News

• MBMR announced that its wholly owned subsidiary, Oriental Extrusions Sdn Bhd (OESB) has entered into an agreement purchase the remaining 22% stake in Oriental Metal Industries Sdn Bhd (OMI) for a cash consideration of RM1.7m.

• OESB is buying a 19% stake in OMI from Central Motor Wheel Co Ltd and another 3% stake from Toyota Tsusho Corp of Japan.

• The purchase is expected to be funded via internal fund and deal is expected to be completed no later than 12 March 2018. Post the exercise, OMI will be wholly owned subsidiary of MBMR.

Comments

• We are relatively negative on the acquisition as MBMR has to fully recognize losses incurred at OMI in the near term. To recap, OMI reported a loss of RM9.7m for 9M17. Nevertheless, management is confident that OMI will be able turnaround when it achieves full capacity expansion (depending on market demand).

• Management mentioned that the rationale of the acquisition would allow the group to facilitate the decision-making and open up the opportunity and flexibility by OESB in choosing and initiating new working relationships with other parties.

• The immediate focus of the management is to reduce the rejection rate of alloy wheel plant’s output from 40% to 20% and improve the plant’s capacity utilization up to 90% to breakeven. The maximum capacity of the plant is at 750k units/year or 62.5k units/month and currently the plant is running only at 50%-60% utilization rate. Management has previously indicated that the new alloy wheel plant needs to fully expand to 1m units/year to achieve meaningful profits.

• We believe OMI will be able to narrow its losses from the improved production from the new MyVi order as well as cost cutting measures by the management.

Risks

• Prolonged tightening of banks’ HP rules.

• Slowdown in the Malaysian economy affecting car sales.

• RM depreciation.

• Successful turnaround of OMI.

Forecasts

• Unchanged.

Rating

BUY ↔

• MBM is expected to leverage on sustainable sales of Perodua in Malaysia (as well as opportunity for export market). Perodua has invested into major manufacturing facilities for engine (with Daihatsu) and transmission (with Akashi Kikai and Daihatsu) to improve its cost structures and support its long term growth. Furthermore, OMI has started to show positive signs of turnaround in 2Q17.

Valuation

• Maintain BUY on MBM with unchanged TP of RM2.68 based on SOP.

Source: Hong Leong Investment Bank Research - 13 Feb 2018