INVESTMENT HIGHLIGHT

• Removal of OMIA losses from 3Q19 onwards

• 60% holding company payout policy is a minimum; we see room for further upside

• Improved dividend visibility and strong net cash position should catalyse strong re-rating

• Re-affirm BUY at higher TP of RM4.55, attractive 5.5% yield

Removal of OMIA drag. OMIA effectively ceased operations end-June 2019 having completed its contract obligations with Perodua. Labor force has been redeployed to other units while some of its foreign workforce was terminated. Cessation of OMIA operations effectively removes circa RM20m of expected annual losses (10% of FY19F earnings) and is a positive catalyst for MBM’s group earnings.

Likely to see gain from OMIA disposal. MBM is in talks on the sale of OMIA’s assets (including equipment, building and land). The sale is likely to result in a gain as OMIA’s assets have been almost fully written down – the bulk of the write-down was recognised in FY17. Notably, the land that the plant sits on has never been revalued.

Hino sale completion. The sale of a 22% stake in its Hino businesses (leaving a remaining 20%) was also completed in June 2019, which will bring in proceeds of RM74m. Post-disposal, we estimate Hino’s contribution to group earnings to reduce to circa RM10m annually from ~RM20m per annum previously. This reduction in earnings is more than offset by the removal of OMIA losses as mentioned above.

Debt repayment. MBM is looking to pare down further its debt with RM128m targeted to be repaid by year end. MBM has gross cash of RM239m as of end 2Q19 and the repayment should leave MBM in a net cash position by year end. We estimate MBM’s FY19F net cash position at RM195m (50sen/share, or 12% of market cap) after also taking into account proceeds from the 22% stake disposal in Hino.

More aggressive dividend policy. Management clarified that its minimum 60% dividend payout policy is at the holding company level. However, the bulk of holding company earnings is derived from its 22.5% stake in Perodua, which also makes up the bulk of MBM group earnings - Perodua pays a consistent 60% dividend payout. All four of MBM’s subsidiaries are also dividend-paying with very little cost at the holding company level. Additionally, the group’s new 60% payout policy is aligned with that of all its units, essentially. We estimate at MBM group level, payout would be effectively 40%-50% of group earnings and revise our assumptions accordingly. The much improved visibility in dividends could address the drag on MBM’s valuations which have historically traded at a discount (average 8.5x PER) against the sector’s ~12x, and catalyse a strong valuation re-rating. Management also reiterated that the 60% holding company payout policy is the minimum (implying room for further upside). At our new 45% group payout assumption, implied absolute dividends is RM91m (FY19F), which is just 75% of estimated FY19F dividends MBM receives from associates (excluding dividends from subsidiaries). Implied yield is still an attractive 5.5% (FY19F).

Source: MIDF Research - 26 Aug 2019