• We initiate coverage of MBM Resources with a BUY and TP of RM2.45/share

• Earnings has reached an inflection point and is set to rise 39% in FY18F on Perodua’s new launches and positive spillover on MBM’s parts manufacturing and dealership units

• Following a steep 40% fall in share price in the past 2 years, MBM’s stake in Perodua is now deeply undervalued at just 8.8x FY18F earnings

• MBM itself is a deep value play, trading at less than half of book value reflecting already rock-bottom expectations

• A 3%-8% Perodua TIV growth from the new MyVi and SUV, a stronger RM and a recovery in industry production are key catalysts

We initiate coverage of MBM Resources (MBM) with a BUY and a SOP-based target price of RM2.45/share (See Exhibit 38). Our thesis is premised on: (1) A deeply undervalued stake in Perodua (2) A solid 39%yoy earnings growth in FY18F (3) Turnaround of MBM’s parts manufacturing division (4) A proxy to TIV and TIP recovery (5) A beneficiary of the stronger Ringgit (6) Deep value play trading at less than half FY18F book value and below historical average PE of 9x. (7) A solid balance sheet at just 9% FY18F net gearing.

Inflection point reached. After a 19% fall in FY17F earnings impacted by the weak Ringgit, MyVi run-out as well as weak auto parts and dealership volumes given an industry slowdown, MBM is set for a strong earnings recovery from FY18F (+39%yoy). Underpinning our view are: (1) Significant launches by Perodua in the next 14 months (2) A recovering Ringgit (3) New model penetration by MBM’s alloy wheel division (4) A recovery in overall industry production following sustained TIV recovery since early FY17F.

Deep value. Share price has already fallen 40% from the peak of RM3.29/share in June 2015, reflecting weak earnings in the past few years. Valuation at just 8.8x FY18F earnings is now undemanding relative to 9x historical, while expectations are now at rock bottom. At FY18F PBV of just 0.48x, MBM is already trading at trough valuations (See Exhibit 31). More importantly, MBM’s deeply undervalued stake in Perodua positions it as a prime acquisition target, in our opinion.

Perodua at the core of MBM’s earnings recovery. We forecast Perodua earnings to rise 13% in FY18F reflecting fresh contribution of Perodua’s new model launches. An expansion into the SUV segment could drive further significant growth beyond FY18F, while the strong RM against the JPY is positive for Perodua’s margins. MBM’s auto parts manufacturing (mainly airbags/seatbelts/steering/wheels) and Perodua dealerships are spillover beneficiaries of Perodua’s new launches in the next 12-14 months.

Source: MIDF Research - 16 Nov 2017