Investment Highlights

• We maintain BUY on MBM Resources with an unchanged FV of RM2.87/share based on an FY19F PE of 9.5x.

• MBM organized a visit to the OMI Alloy plant this week. Our report focuses on the working relationship OMI has with China’s CITIC Dicastal, specifically on the status of the plan for a tie-up and the impact it would have. This is also a follow-up to the report from our first visit (“Partnering up for more OMI volume” dated May 28).

1) OMI to finalize the tie-up with Citic by year-end. OMI’s alloy plant will soon undergo assessment by Citic’s major customers, as part of the due diligence. Recall that the tie-up would be significant for OMI as it would serve to boost volume (by serving Citic customers in India and Europe), improve operating efficiency and position the company as a partner to the world’s largest supplier of aluminum wheel and chassis components.

2) The collaboration has served to lower OMI losses from resolving operational issues. Citic’s has been a technical partner since 2017 and will provide further training for OMI Alloy to reduce the rejection rates in the casting process and painting process, to below 10% and 2% (from 10-12% and 5% respectively). OMI saves RM40K annually from every reduction of 1 ppt. The company guided that it has lacked the know-how to manage the volatile conditions within these processes. As a result, it has seen a poor through yield or pass through rate of 65% vs. Citic’s 92-95%.

3) The support from Citic has been crucial in fortifying operations and securing volume. OMI guided that the arrangement with Citic was a part for it to win the contract to be the sole supplier of wheels for the incoming Perodua SUV. Addition of the SUV (and the doubling of deliveries for the Perodua Axia) will raise OMI Alloy’s utilization rate to 56% by year-end from 50% last year.

• OMI also said that it is still hashing out the terms for an agreement to supply to Proton in its next phase of growth. Recall that a rebadged Geely SUV will arrive this 4Q with localization aimed for 2HFY19.

• We are assured in the steady approach OMI has taken to forge a stronger foundation and build a better relationship with its key client.

• Given MBM’s clearer path to recovery, we believe UMW would see pressure to raise its offer price from RM2.56/MBM share closer to RM2.94 (which would imply a PB multiple of 0.8x and FY19F PE of 9.8x; vs. a PB of 0.7x and PE of 8.5x based on the current offer price).

Source: AmInvest Research - 13 Jul 2018