Quoting The Edge Weekly, MBMR is looking for a buyer for its loss-making wholly-owned OMI alloy wheel plant. We are positive on the news as the plant has been loss-making since 2012. For illustrative purposes, the plant disposal and eliminating plant losses will boost our FY19E NP by 16%. Nevertheless, pending further announcement, we made no changes to our FY18E-19E NPs. Reiterate OP with an unchanged TP of RM2.90, based on 8x FY19E EPS.

Looking for a buyer for its alloy wheel plant?. Quoting The Edge Weekly, MBMR is looking for a buyer for its bleeding alloy wheel manufacturing business, under wholly-owned Oriental Metal Industries (M) Sdn Bhd (OMI). Its initial investment for the plant was RM103m, which had been impaired down to RM46.7m as at 31st Dec 2017. A previously announced tie-up with Chinese alloy wheel makers, Citic Discatal, meant to spur a turnaround by lifting sales and boosting cost efficiencies, had fallen through, according to executive chairman, Datuk Abdul Rahim Abdul Halim. It is also noted that the breakeven point is still far considering the high rejection rates, production inefficiencies and low utilisation rate at the plant, which maximum capacity is at 750k alloy wheels/year, and able to expand up to 1m alloy wheels/year (expected c.420k units or 56% capacity utilisation for FY18, FY17 at 301k units, which mostly utilised by Perodua). Under the Citic Discastal agreement, they planned to utilise 50% of OMI capacity to supply wheels to Europe, India and Malaysia.

Expecting a boost in FY19E NP by 16%, post-disposal. We estimate losses after tax for OMI at RM27.6m for FY18 and at RM23.0m for FY19. For illustrative purposes, post-disposal, minus the plant losses, this will boost our FY19E NP by 16%, and in turn raise our TP to RM3.40 (from the current RM2.90). As at 31st December 2017, the plant accumulated losses is at RM128.7m, and the book value for the plant is at c.RM46.5m. However, if MBMR fails to find buyer for the alloy wheel plant and without the Citic Discastal contract, we estimate losses after tax for OMI to continue at c.RM27.6m/year, which may erode our FY19E NP by 3%.

Outlook. Perodua has surpassed its target of 209,000 units to close at 227,243 units (+11%) for 2018. We expect better sales in the upcoming quarters buoyed by the all-new Perodua Myvi and all-new Perodua ARUZ (RM73k-78k). The all-new Perodua Myvi booking has hit 120k units, with 100k delivered, while all-new ARUZ garnered 2.2k booking starting early Jan 2019. Moving forward, the Motor Trading Division will benefit from stronger margin sales from the Volvo premium segment and the strong market reception of the Perodua affordable variants.

Pending further announcement, we make no changes to our FY18E-19E NPs and we reiterate our OP call with an unchanged TP of RM2.90, based on 8x FY19E EPS, at -1SD of its 5-year Fwd. historical mean PER. We like MBMR for: (i) its deep value stake in 22.58%-owned Perodua and (ii) Dual income streams as the largest Perodua dealers and manufacturing side as parts supplier for Perodua as well as other popular marques.

Risks to our call include: (i) lower-than-expected car sales volume, and (ii) lower-than-expected associates’ contribution.

Source: Kenanga Research - 22 Jan 2019