We visited MBM Resources (MBM)’s alloy wheel plant and are positive that the segment is on track to break even in 2020 (from RM30m losses in 2017) on: 1) a higher plant utilisation of c. 80%, supported by stronger OEM demand from the new Perodua SUV, 2) higher export sales with Citic Dicastal and 3) better operational efficiency. Reduced losses from the alloy wheel business, margin expansion from a stronger Ringgit and a higher contribution from 22.58%-owned Perodua should drive earnings growth and lead to a re-rating of MBM, which is currently trading at an undemanding 7.7x 2019E PER.

About MBM’s OMI Alloy (OMIA)

OMIA, MBM’s wheels and tyre assembly unit, has reported consecutive losses (RM30m losses in 2017) since 2012 due to insufficient volumes, high rejection rates, low selling prices and rising material prices. Operationally, the business has achieved significant efficiency improvement - its rejection rate has improved to 15%, from 40% in 1Q2017. OMIA targets to reduce the rejection rate to 10% by early 2019.

Forging Ahead in OEM Market With Perodua…

About 74% of its 2017 alloy wheel revenue was derived from the OEM market, mainly driven by the supply for Perodua models: Bezza, Axia, and Myvi standard variants. OMIA recently bagged the contract to supply wheels for the new Perodua SUV, slated for launch at end-2018. This new contract should lift OMIA’s production volume by 12k units/month to 47k units/month (close to the breakeven level of 50k units/month). OMIA is also looking to expand the OEM customer base through active engagement with Proton and Honda.

…and Export Market With China’s Citic Dicastal

Internationally, Germany is OMIA’s key export market. In May 2017, the group signed a cost-plus agreement with China-based Citic Dicastal (CD), the world’s largest alloy wheel maker that commands about a 23% market share globally and 45% market share in China. Under the agreement, CD will utilise c.50% of OMIA’s capacity to supply wheels to Europe (in response of the heavy EU anti-dumping duties on Chinese wheels), India (poor China-India bilateral trade relationship) and Malaysia. In exchange, CD has agreed to provide technical support to OMIA, which could potentially see the plant turn around faster than expected.

Executing the Final Expansion Phase by 2019

Separately, OMIA is looking to increase its production capacity to 1m units per annum (p.a.) by 2019 from its current capacity of 750k units p.a. Management guided that RM13m of capex will be allocated on new equipment and machinery for the capacity expansion.

Stronger Associate Earnings

We have reviewed our earnings forecasts for its 22.58%-owned associate, Perodua. The continued strong demand for Perodua’s key models lifted its 4M18 market share to about 41% (4M17 market share of 35%), cementing its title as Malaysia’s auto market leader. The new Perodua Myvi, launched in November 2017, had received bookings of 70k units with 38k units delivered as of the 3rd week of April 2018. The strong associate earnings (RM36.8m in 1Q18, +41% yoy) looks sustainable, in view of the robust demand for the new Perodua Myvi, a possible hike in the sales volume arising from the tax holiday (Jun-Sep 2018) and the introduction of the new Perodua SUV in late 2018.

Maintain BUY With a Higher Price Target of RM3.27

We revise up our 2018-20 EPS forecasts by 2-11%, factoring in: 1) higher associate contributions, 2) higher volumes at the alloy wheel segment, and 3) lower steel wheel volumes (Fig 2). In tandem with our earnings revisions, we increase MBM’s 12-mth target price to RM3.27, based on an unchanged PER target of 10x on our 2019E EPS (rolled forward from 2018E). MBM is currently trading at an undemanding 2019E PER of only 7.7x. Maintain BUY. UMW’s takeover offer price of RM2.56 for MBM, valid until Oct 31, should provide some support to the stock price. Downside risks: i) lower-than-expected car sales volumes, and ii) lower-thanexpected associate contributions.

Source: Affin Hwang Research - 8 Jun 2018