We continue to like MBM Resources Bhd (“MBMR”) due to its prevailing attractive valuation backed by its 22.6% stake in Perodua. Recommend BUY with a target price of RM3.50, based on closest industry peers’ price-to-book ratio of 0.8x, translating to 8x PER FY19.

MBMR’s 1Q19 financial results remain intact with ~15% growth in core net profits year-on-year. The improvement was mainly driven by higher vehicle sales from Perodua models, especially from Axia and Myvi, complemented by the newly launch Aruz model. Demand for Volvo also increased along with XC-40 model. Auto parts manufacturing division also showed improvement due to sustained production demand from car makers to fulfil earlier backorder and to replenish depleted stocks, contributing to a lower loss before tax of RM0.4m, which is significantly lower than corresponding quarter loss of RM3.8m

MBMR’s investment merit lies on its multi-brand strategy in the motor trading division carrying the brand of Daihatsu, Hino, Produa, Volvo and Volkswagen, furnishing the group with diversified coverage nationwide. Besides, MBMR’s solid presence also lies on its 22.6% stake in Perodua, which leads the automotive market with market share of 43%.

Despite better performance from auto parts manufacturing division, management is on track to close its alloy wheel plant – Oriental Metal Industries Sdn Bhd (“OMI”) by mid-year 2019, given the significant cumulative losses made-to-date. We believe the closure is positive for the group to streamline its earnings. Moving forward, growth in manufacturing division will be driven by steel wheel manufacturing, wheel and tyre assembly, auto safety and acoustic products without OMI dragging the division’s earnings.

MBMR’s current valuation offers a compelling value proposition with its current PER of 6.1x, which is way below industry average of close to 15x PER. With the closure of its loss-making alloy wheel plant, we expect better earnings driven by higher vehicle sales especially from Perodua.

Source: Rakuten Research - 27 May 2019