Highlights of the MBMR 3Q18 results:

Perodua managed to provide good result even though it was faced with a production issue of the New Myvi. Production has normalised since early October. Expect better performance from Perodua for 4Q18.

Lower losses for the auto parts division due to better production efficiency of alloy wheel division. Alloy wheel division expected to break even by 2019.

Stronger balance sheet with cash balance of RM223mil. As of Sept 2018, the company is in a net cash position.

Better than expected PATAMI recorded mainly from the excellent performance of associate company Perodua. Revised upward PATAMI target of 2018 to RM145mil from RM120mil.

At current price, the valuation is only at 5x PE the lowest in the auto industry even though MBMR has a direct exposure to the market leader Perodua. For the 5 years average, MBMR has always traded at a range of 10x PE. The automotive industry is currently trading at an average of 15x PE.

Hi BN_better,

The drop could be due to the lapse of offer by UMW to take MBMR private on 30th Oct. Some people might be speculating that the offer would go through and were disappointed when it did not happen.

However, if you look at the fundamentals of the company, it still provide the best exposure to the automotive industry via its 22.6% holdings of Perodua which is undoubtedly the market leader in Malaysia.

The current valuation of 6.0x PE and 5.7x 2019 PATAMI is the lowest for the past 5 years. On average the stock has always been trading at a valuation of 10.0x PE. Automotive industry average is higher at 15.0x PE.

22nd Nov was the date when the 3Q17 result was reported last year. PATAMI for 3Q17 was only RM7.3 mil. Expect MBMR to record a higher 3Q18 result.

Maybank had come out with a new report for UMW on the 12th November. In the report, it values UMW 38% holdings in Perodua at RM2,598mil or RM6,837mil for the entire Perodua.

Using the same valuation, the 22.6% interest of Perodua held by MBMR is valued at RM1,545mil or RM3.95 per share.

A lot of people are worried that the stock might be effected due to the trade war and the increas of fed interest rate which would increase the cost of debts for companies.

But investors need to understand that MBMR focus mostly on the domestic market in particular the entry level market. I doubt it wold be effected by the trade war. U can see that a lot of commodities like aluminium has fallen since the trump imposed the tariff on china. This actually helps mbmr as it will reduce the cost of its production (the alloy wheel for example)

In terms of debt, the company has actually very low net debt level with debt mainly used for trading purposed. This means the debt are directly back by trade receivable and inventories. With a company having a fast turnaround on most of the inventories, this is actually not too much a concern.

If u think malaysia economy will slow down. Please used mcdonalds as a reference to what happenn in 2007-2009. Given the nature of perodua products being in the entry market level, a lot of people will actually opt for a cheaper but relible option when buying new cars. This is what happen to Mcdonalds where a lot of people opted to go to mcdonald for their meals instead of other restaurants as it is more cost saving.

Another catalyst that i forget to mentioned is the disposal of the alloy wheel business. Management is looking to disposed of the business (inclusive of land and building ) at a valuation higher than the current book value.

Refer to the AGM Q&A minutes from the AGM back on 24th May 2018:

http://www.mbmr.com.my/Automotive/Investors/Minutes-of-General-Meetings/

I actually suspect that the potential buyer is Citic Dicastal (the leader in alloy wheel in China) since they are already collaborating with MBMR. The collaboration consist of MBMR manufacturing and exporting the alloy wheel (600k to 700k per year) to Citic Dicastal business in Europe.

Citic Dicastal is facing an anti dumping tariff imposed by EU since May 2018 until 2023. They need a manufacturing plant outside of China to escaped the tariff imposed by EU.

The company is currently trading at the lowest level ever in the past 5 years. At 1.89 the company is currently valued at 6.0x PE. The average trading range for MBMR for the past 5 years was 10x PE. This represents an opportunity for investors to enter at a very low entry level.

The last time it was trading at this range, it was due to the underperformance of the Alloy Wheel division which resulted in operational losses as well as high impairment exercises. This is no longer the case as management had decided to make the full/ maximum impairment back in 4Q17. Starting this year, management has indicated there will be no more impairment planned. The alloy wheel business is also expected to be breakeven next year from the partnership with Citic Dicastal.


The immediate potential catalyst for the company would be the 3Q result expected to be out next week. 3Q17 PATAMI was only RM7.3mil. Expect the company to record a PATAMI in the range of RM20mil. It would have been a lot higher if it was not due to the Myvi supply disruption caused by one of their vendors. This issue has since been resolve which means there will be a lot more cars to be delivered in the current quarter thus a higher PATAMI which expected to range around RM40m.

Next year's growth will be driven by the still high demand of new Myvi and the entry level SUV (D38L) which is expected to be launch in Feb 2019. The new SUV is expected to be priced at between RM70k - RM 80k.

FY end Feb 2019 will be a record year for EUPE. Mainly from the progress of their Novum project in Bangsar South. PATAMI for FY19 should be around RM25mil which values the company at only 3.5x PE. Very undervalue.

For continuation of revenue and profits, the company hopes to launch the Vivus project, located in Seputeh (in front of Mid Valley) sometime in the 1H of 2019. If the project managed to received the same level of attraction as Novum (96% take up rate), this would truly means that the company is currently undervalue.

Regards.

Hi mkmk,

I think last time when it fell to 30 sens it was because of the MACC investigation. Now after the company was cleared of any wrongdoings, i think 50 sens is the lowest that it can go. The 3Q result should easily beats lasts year's result unless there are new delays in the development of the City of Dream. i am targeting a PATAMI of around RM12m PAT for both 3Q and 4Q. This brings the total FY 18 PAT of around RM48milThat which values the the company at 3.4x PE.

Whats your PATAMI target for FY18? Maybe i am a bit bullish but i am projecting the 3Q and 4Q only based on 1Q and 2Q results. And also based on the management guidance.

https://www.thestar.com.my/business/business-news/2018/08/28/ewein-sees-record-revenue-on-city-of-dreams-project/

Regards.

Hi Tanflash,

Very late reply. Apologize.

Good to hear that you are still making money even though you are not bullish in the stock. Your profit should be higher if you take into account the dividend paid by the company during your tenure.

I guess your concern on the cash flow relates directly to the receivables which has gone up from RM110mil in FY 14 to RM177mil in 1Q19.

I was also worried previously of this increasing receivables but was reassured by the trade receivables ageing as of Dec 2017. RM 115.4mil was classified under "neither past due or impaired" which represent 86% of the total net trade receivables value of RM135mil.

Hopefully you will be bullish back with the stock once they improve their cash flow.

Good luck with your other investments. The current market environment is a bit bearish for investors. In my opinion, it is better that we stick to those companies that are strong fundamentally but is trading at a cheap valuation.

The new planned petrol subsidy mechanism would be a positive development for Perodua and indirectly MBMR ( holds 22.6% of perodua). Lim Guan Eng mentionned that the subsidy mechanisms will take into account the engine capacity as well as the car model (i assume the model chosen will be based on the price of the car. Don't think anything above rm100k will be considered) . Given that perodua is the leader in the entry level market (via myvi, bezza and axia models), it is sure to benefit the company as customer now will have to consider the potential petrol subsidy in their decision on which car to buy.

http://www.theedgemarkets.com/article/guan-eng-luxury-cars-not-eligible-targeted-petrol-subsidy

At the price of rm1.93 per share the company is currently undervalued at 6.3x PE (2018 Target Pat of RM120m). Assuming a PAT of Rm135m in 2019 , this translate to a forward PE of only 5.7x.

3Q18 result is expected to be out by end of this month.

The average industry valuation is currently 15x PE.

The current PE multiple for MBMR is only 6.5x. The industry average is now trading at 15x PE.

There are 7 analysts covering MBMR at the moment with their target price ranging from RM3.04 to RM3.60 with the average being RM3.26.

Their profit target for 2018 ranges from RM109m to RM133m with the average being RM122m.

This values MBMR at around 10.4x PE which is still below the industry average.

Another alternative of valuing MBMR is by looking at the analyst reports of UMW. Most of the analysts use the Sum Of Parts methods in valuing UMW. From there we can look at what are the valuation given to Perodua and then apply the 22.6% (represent MBMR holding in Perodua) to the valuation.

There are 7 analysts that use the sum of part method in valuing UMW. They applied a PE multiple that ranges from 10x to 16x with the average being 12.8x PE. The analysts average PAT for Perodua is RM537mil which means MBMR PAT portion would be around RM121mil. This translate to an average MBMR target price of RM3.94 per share (RM121m x 12.8PE / 391mil shares).

As you can see in both cases (direct and indirect methods) MBMR current price is considerably undervalue.

Feel free to comment. Appreciate any inputs especially if i have missed out anything in my analysis.

Regards.

UMW had decided to let the offer to take MBMR private lapse. I don't think it is much of a suprise to many market players as most believed that the offer price was too low.

Now that the uncertainties associated to the deal has been lifted, hopefully market will evaluate MBMR based on its fundemental.

As it is, MBMR is the cheapest auto company in bursa at 6.5x PE compared to the industry average of 15x.

Future earnings growth will be driven by
1) the strong demand of the New Myvi (20,000 undelivered bookings as of sept)

2) the introduction of the cheapest SUV into the market schedule in Feb 2019 (due to high expected demand, Perodua had actually decided to start production of the new SUV in Oct)

3) turnaround of the alloy wheel manufacturing from the expected higher demand generated by the collaboration with Citic Dicastal to supply to the export market.

Hi Hafid,

I think people are focusing too much on the RM2.56 offer by UMW back in March.

I believe investors got sidetracked a bit on what is really being offered when buying MBMR shares.

As mentioned in my previous posting, MBMR offers investors to buy into the Perodua business at a very low valuation of 6.6x PE (assuming RM120mil PAT in 2018). The only other way of having exposure to Perodua is by buying UMW shares but for me its a more expensive way as UMW is currently trading at 13.8x PE (assuming recurring PAT of RM400 mil in 2018).

The offer price made by UMW back in March was actually based on 9.5x 2017 PAT of RM440mil (Perodua full year profit in 2017) plus RM60mil for MBMR other businesses. If they are still interested they will need to increase the offer to reflect the higher profit expected from Perodua in Fy 2018 and FY 2019 (between 530mil to 600 mil).

Regards.

Another big potential for this company that analysts did not highlight is the market trend of Malaysian consumers in the automotive industries.

As shown by other global markets, the segment that currently have the biggest growth is the SUV segment. Malaysia's SUV penetration rate in 2017 was 11.5% but expected to grow to 20% in 2020 and to a further 30% by 2025.

Perodua (where MBMR holds 22.6% interest) will be one of the players that is expected to benefit from this shift of trend especially given that they are expected to price their new SUV (schedule to launch in Feb 2019) at a price range of between 70k -80k. This would mean that their SUV will be one of the cheapest (if not the cheapest) offering to the Malaysian consumers.

Their confidence in the SUV is shown by their decision to start with the production of the new SUV this month (as per originally schedule) even though launching will only be made in Feb. I believe this is a strategic decision made in order to make sure that any future demand of the SUV can be delivered on time to the customers.

Assuming SUV segment would command better margins, i would assume that the Perodua and MBMR indirectly (the alloy wheel for Perodua and Proton SUV will be supplied by MBMR) will post better profit in 2019.

The stock is currently oversold given the current price of 1.95. Which is the lowest since 2012 (7 years). The last time the stock traded at this price was way back in 2015 when the company recorded a Patami of RM8m and RM7m for 3Q15 and 4Q15 respectively. The low profit back then was mostly due to the statrt up loss of the alloy wheel manufacturing which this year has improve their operations substantially. The business is expected to be breakeven in FY19.

Profit for FY18 is expected to reach the RM120mil level. Which currently values the company at a mere 6.35x PE.

Hi hafid,

For 12 month trailing PAT, you need to take out all of the impairment occurred in 3Q and 4Q FY2017 which amounts to RM 253mil as this in non recurring, non operation and non cash in nature.

As indicated by the chairman during the AGM, there will be no more impairment planned going forward as most of the impairment were done in FY17 (mostly related to the Hirotako Holdings, Autoliv Hirotako and the alloy wheel businesses).

Excluding the impairments the total PATAMI for 3Q and 4Q 17 would be around RM50mil.
This translate to a 12 month trailing PATAMI of RM117.4mil or an EPS of 0.30 per share.

In terms of valuation , the 12 months trailing PE is 6.99x

Hi Saw,

Yes. there is no denying that MBMR is currently trading at a very undemanding valuation of less than 7x 2018 PE compared to the industry average of 15x PE.

All 6 research house has a buy rating on the stock with an average TP of RM3.24 per share or 54% above the current share price of RM2.10.

Hi Yong,

Why did you say the alloy wheels business is going to have a big loss in coming quarters?

I actually believes that they are on track for a break even level in FY19 backed by increase export volume from their partnership with Citic Dicastal, China largest alloy wheel manufacturer as well as the new SUV launched by both Proton and Perodua.

The new SUV was delays to Feb 2019 instead of Dec 2018 was mainly for strategic marketing reason in anticipating for the launch of Proton's X70. Perodua do not want their marketing campaign to be diluted by the launch of the X70. However in term of market segments, these 2 SUVs are actually fall under different markets. The X70 is expected to be priced between RM98k to RM112k (https://www.zigwheels.my/new-cars/proton/x70) whereelse Perodua New SUV is expected to be priced at between RM70k to RM80k.

On the deal, if UMW sticks to their price of RM2.56, i think management should reject the offer. The next 2 quarters will show good growth vs last year's results mainly from the good results from Perodua. However, the deal actually depends mainly on Mara who since July has control over the board of Med Bumikar (holder of 50.07% of MBMR). They had just reappointed a new chairwoman and had changed most of the composition of the board members last week.

Deal or no deal, at the current price of RM2.04, MBMR is only valued at 6.6x PE (assuming FY18 PATAMI of RM120mil. 1H PATAMI is already at RM67.5m). Current average PE for other automotive players is above 15x.

And victor,

They also needed the money for the alloy wheel manufacturing plant previously.

Now there is not much of capex needed apart from the RM12 mil for the expansion of the alloy wheel plant in order to increased the max capacity form 750k wheels to 1 mil unit per year.

The partnership with Citic Dicastal (China biggest alloy wheel manufacturer), will hopefully increase orders for the alloy wheel from only 300k units in FY17 to at least 700k units by FY19.

Hi Victor,

Understand your dissatisfaction for the low dividend payment. But i think in the future they will be able to pay higher dividend.

The main reason to why they did not pay good dividend previously was because management believes its better to used the money to pay the debt first.

If you look at their annual or quarterly report, back in 2012 their total debt was at RM550mil with net debt (after deducting cash balance) at RM260mil. Net gearing was 16.7% (not that high actually).

As of June 2018, their debt is now at RM220mil with net debt at only RM40mil. Net gearing is only at 2.2%.

Please take note that for manufacturers in general (you could verify this with other listed manufacturers), they used debt for working capital in order to finance their inventories. So basically the short term debt is actually been backed by inventories and receivables (sales yet to be turned to cash).

For MBMR, the cash conversion cycle in 2017 was 42 days which is quite good for a manufacturer.

Basically, i also hope they will start paying more dividend in the future. If management can commit to a minimum payout ratio to investors, it would be a lot better especially for those investors that depends on dividend (EPF, PNB, Tabung Haji, Kwap etc). They might start to add more position in this company.

Hi Victor,

Yes could be. Also noticed that EPF is also continuously buying UMW. So maybe they believe that a deal could be reach in the future.

However, i believe its safer for you to look at the company's fundamental first when deciding on whether to invest in a company or not. From my personal assessment, MBMR is currently trading at a very undemanding valuation of less than 7x PE with future profit growth intact. The average PE for other automotive companies is currently more than 15x PE (double to that of MBMR).

A deal with UMW for me is a bonus for investors to monetize their investment earlier. That being said it should only be done at a right price off course.

Yup.. Everyone including all the analysts that cover the company has a target price that is above umw's offer price.

Hi victor,
they won't actually do that. Their objective is to consolidate their holdings in perodua. They will only proceed with mbmr if they know they can convince Med Bumikar to sell their 50.07% in MBMR If they were to buy from the open market, they will at max end up with 49.93% of MBMR. They would not be able to consolidate MBMR balance sheet, p&l and cash flow. And worst they would not have control over the company and end up as a minority.

Prevoius negotiation with Med Bumikar hit a roadblock due to the change of govt mainly due to the potential change of heads in Mara, the controlling shareholder of Med Bumikar. This was confirmed yesterday with the appointment of Hasnita Hashim as the new chairman.

That being said, i dont think UMW offer of 2.56 is valid anymore given the higher profit that perodua is expected to achieve in FY2018 onwards.

For me, if UMW do not want to increase the offer, Med Bumikar should reject it. With or without UMW, MBMR is still undervalue given its 22.6% holding in Perodua, leader of the automotive company in Malaysia.

How much should MBMR be valued?

For me the minimum valuation for MBMR should be the value of its 22.6% interest in Perodua. When UMW made the offer to buy Med Bumikar 50.07% and subsequently and MGO at RM2.56 per share it was made based on Sum of Parts of MBMR's interest in Perodua and other business division. Total offer amounted to RM 1bil.

At the same they also made an offer to PNB Equity Resources Corporation's 10% interest in Perodua at a valuation of RM417.5mil. This value the total company at RM4.18bil.

At the point of offering, the valuation was made based on Perodua FY17 profit of RM440.2 mil(refer to UMW 2017 annual report page 179 of the financial statement) or at a PE valuation of around 9.5x PE.

Perodua profit for FY2018 will easily hit the RM600mil mark. Using the same valuation multiple UMW used during the offer back in March, Perodua should be valued at a minimum of RM5.7bil. MBMR's 22.6% interest should be valued at least RM1.29bil or RM3.30 per share.

Please take not that this does not include MBMR's other businesses such as Federal Auto Holdings (owner of distribution rights for Volvo and Volkswagen), Daihatsu Malaysia (distributor of Hino trucks and Daihatsu.), Hirotako Holdings (supplier of automotive components) and Oriental Metal Industries (main supplier of steel and alloy wheels in Malaysia. Expected to turnaround in FY19 in collaboration with Citic Dicastal, largest alloy wheel producer in China)

If you think the 9.5x valuation is high, below are the valuation for other automotive companies in Malaysia. Prepared by Kenanga Investment (https://klse.i3investor.com/servlets/ptres/46874.jsp)

Bermaz 12.8x
DRB 12.4x
Sime Darby 23.1x
Tan Chong 20.0x
UMW 18.9x
APM 14.1x
PECCA 11.2x

Average 16.1x

Agree with Yael.

3Q18 result should be better than 3Q17 and 2Q18 which will be pushed by the higher sales/invoicing of Perodua vehicles. In 3Q17 there were only 49,811 perodua vehicles invoiced. In 2Q18 there were 54,995 perodua vehicle invoice. A big portion of the bookings made by customer, especially during the tax holiday will be invoiced in the coming quarters.

Total profit for 3Q18 should be highest for this financial year even if the sales in September is expected to be lower.

https://www.thestar.com.my/business/business-news/2018/09/03/perodua-cars-1-3pct-cheaper-under-sst-pricing/

Hi trulyinvest,

The drop is actually because of higher tax which relates to the RPGT for the disposal of Shah Alam land. The RPGT was RM9.3mil (which is non recurring).

If you take that out, PAT would actually show growth (even if you include CCMDBIO profit in 2Q17).

PAT excluding non recurring items (gain on disposal of land & RPGT on disposal of land) would have been RM10.5mil.

Regards

Just to provide some industry comparable based on 2018 fwd PE. Got this from Kenanga (https://klse.i3investor.com/servlets/ptres/46874.jsp)

Bermaz 12.8x
DRB 12.4x
Sime Darby 23.1x
Tan Chong 20.0x
UMW 18.9x
APM 14.1x
PECCA 11.2x

Average 16.1x


Now for MBMR, Kenanga projected a higher 2018 PAT than me (RM 133.5m vs mine of RM120m)

Their fwd PE for MBMR is only 6.8x.

Thanks

Hi david,

Good question.

For the short term, I believe that MBMR can easily beat their 3Q and 4Q 2017 results.

Beyond 2018, i am still optimistic of this company's earning sustainability (and hopefully growth).

The current government decision to slow down spending in infrastructure project (public transportation in particular) will make Malaysian still dependent on cars as the main mode of transport. In Klang valley for example the LRT3 project which was initially stated to complete by 2020 was push back to 2024.

In addition to this, the potential protective measures for the new automotive policies might prove to be an advantage to local car manufacturers in particular Perodua and Proton which directly help improve MBMR business (MBMR is one of the main local automotive parts manufacturer and assembler. Main clients are Perodua and Proton).

The future SST that is to be introduce in Sept has exempted CKD sedan and hatchback cars which means that the price of Perodua models would most likely remain around the same level as during the tax holiday period.

All these being said, MBMR is currently only trading at 7.5x fwd PE (assuming FY18 PAT of RM120mil).

Pecca, which derive 50% of its revenue from Perodua, is currently trading at 15x PE.

UMW who holds 38% interest in Perodua is currently trading at 19.8x fwd PE (assuming FY18 PAT of RM350)

Thanks

Hi alpacino,

No i did not invest in CCMDBIO. For the health manufacturer sector i prefer AHEALTH or Apex healthcare.

AHEALTh valuation is currently at 17.9x 12 months rolling Earning vs CCMD 19.5xPE.

The growth story for APEX are :

1) New oral dosage plant (to be commission by 4Q18) which will double the oral dosage capacity.

2) Potential penetration into the Europe drug market given the company's recent EU good manufacturing practice certificate award early this year.

3) Expiry of the current govt concession for generic drugs by Nov 2019. Currently APEX revenue from this segment only represent 5% of total group rev. Most of the rev actually comes from the private sectors (private hospitals etc)

My FY19 PAT target is around RM60mil which values the company at around 15.2x PE.

Please take not that the company has basically ZERO debt (at least as at 30 June 2018).

Regards.

Hi guys,

I need to highlight certain things for the 2nd quarter 2018 that was just reported earlier.

The PAT of RM5.3 mil is actually inclusive of a RM4.1mil gain on disposal of Shah Alam lands as well as the Real Property Gain Tax that are associated to the disposal amounting to RM9.3mil.

If we were to take both of these non recurring items out, the PAT would actually amount to RM10.5mil which is not that far from what was recorded in the 1st quarter of 2018. Both the Chemical and Polymer divisions have shown improvement in the revenue as well as profit before tax for the 2nd quarter.

Please refer to Note A9: Segment Reporting located in page 9 of the financial report (Below are the extract for continuing ops. I have excluded the results of the pharmaceutical division, which is now actually under CCM Duopharma)

Revenue 2Q18 vs 2Q17

Chemical : RM 76.65m vs RM 65.14m

Polymer : RM 23.04m vs RM 19.48m

Others : (RM 0.67m) vs (RM 0.20m)

Total: RM 99.01m vs RM 84.42m


PBT 2Q18 vs 2Q17

Chemical: RM 12.63m vs RM 9.94m

Polymer: RM 5.10m vs RM 4.59m

Others : (RM1.36m) vs (RM 11.49m)

Total : RM 16.37m vs RM 3.04m

As you can see, both the divisions have actually reported better revenue and PBT compared to last year. Hopefully this will continue in the second half of the year as well.

Appreciate any input on the matter especially if i had missed any other information that might be important.

Best regards

Hi Hafid,

Can you share the bad news?
From my understanding there are more good news actually for this company. Here are some that i personally have concluded (feel free to correct me):

1) 2Q18 result which should be out this week would show improvement vs last year.
2) Overall FY18 result to be one of the highest in the company record (from the sales numbers of Perodua vehicles). However to be conservative, i project a profit of RM120mil for MBMR in FY2018.
3) SST: CKD vehicles are tax exempted from the new SST. This bode well for Perodua especially the best selling Myvi. Basically price should not defer much compared to the price during the tax holiday period.
4) Potential turnaround of alloy wheel manufacturing division in FY2019.
5) No future impairment expected in near future (from the chairman indication during the AGM back in May).
6) Beneficiary of the new automotive policy by the new govt.

Thanks.

Hi Wolf,

Sorry late reply. Had a busy weekend this time round.

Currently, in the malaysia market there is no direct comparable for CCM. The other main caustic soda supplier is Malay Sino Chemical Sdn Bhd which is privately held by Batu Kawan Berhad (however, this company's earning is mainly derive by its plantation division, so basically it's actually plantation company).

The closest comparable that we have at the moment are the Malaysian public listed chemical related companies such as Luxchem (PE 15.1x), Pchem (17.4x), Lctitan (10.1x), Nylex (6.9x), Samchem (9.9x) and KGB (14.7x). The average PE multiples of these companies are 12.4x.

Using the industry average PE of 12.4 x and FY19 PAT target of RM40mil this translate to a market cap of RM496mil or RM 2.97/ share.

Anyway, the current valuation now is still undemanding if compared to other listed chemical companies. I just don't see why the market needs to put a big discount on CCM given the potential growth that it can reap once the RAPID refinery in Pasir Gudang starts operation in 2019 (CCM main plant is also located in Pasir Gudang. Malay Sino, the other main supplier of caustic soda has plants in Kemaman and Lahat).

Feel free to comment. Appreciate the any input that you have on this company.


Thanks.

Hi Kiasipu,

You are right to highlight the potential higher PAT due to the tax holiday (june - Sept period).

However, I just like to be a bit conservative in my projection.

But if they do get the RM150mil PAT for FY 18, that would translate to an even lower fwd PE ratio of only 6.2x.

Ridiculous valuation for an exposure to Perodua which is the market leader in Malaysia.

And i think the market has yet to consider the potential turnaround of OMI Alloy in FY2019. MBMR has already rope in the biggest alloy wheel manufacturer in China, Citic Dicastel. Their plan in 2019 is to produce around 700,000 alloy wheels mainly for export to Europe market. This is more than double the production output of 300,000 alloy wheels recorded in FY2017.

Thanks.

Hi KiasiPu,

Agree with u on the expected better result for 2q18 (should be out next week). Perodua managed to sell 61,530 cars for apr-june 2018 period compared to last year sales of only 50,169 cars for apr-june 2017.

Based on a projected profit of rm120mil for Fy2018, mbmr is currently only trading at a mere 7.8x fwd PE.

To put things into perspective, if Tan Chong managed to record the same amount of profit of rm12.4mil in 3Q and 4q of fy18, total profit for the year would amount to around rm42mil. At the current price Tan Chong is trading at a valuation of 26.9x fwd PE.

Thx.

Hi Keong,

Another thing that i would like to highlight is the Cash Flow that the company generated from operation in 1Q18 which amounts to RM26mil. Hard to find companies with a low valuation and generating positive cash flow at the moment. Hope they can sustained this and grow the cash flow even further in 2019.

For me it is currently the cheapest company that an investor could buy into for an exposure to the Rapid project and also the rubber glove industry (they are one of the supplier of calcium nitrate under the Polymer division to the gloves industry). Basically an increase of capacity by the glove industries actually bodes really well for companies like CCM (there are other companies as well but CCM for me is the cheapest at the moment). They also supply liquid chlorine to the glove industries.

Assuming a PAT of RM40mil (this is actually a more conservative projection. The CEO expect the PAT to actually double in FY 2019 which should be around RM50mil), current valuation is only 6.7x PE.

Average forward PAT for Gloves company is around 20xPE. Other malaysian chemical companies is currently trading at double digit PE.

Thanks.

Hi Keong90,

I think investors are just worried on the trade war between China and US. I believe the impact of the trade war for the company's main product which is Caustic soda will be limited to the US, China and and in particular the Malaysia markets. Import of caustic soda from China to the US is actually very limited.

For the Malaysia market in particular, demand for caustic soda is expected to grow by another 100,000 MT in 2019 once the Rapid Refinery starts to operate. Currently the Malaysian market for caustic soda is around 430,000 MT of which 290,000 MT is being sourced by local suppliers (mainly CCM and Malay Sino Chemical) while the rest by import.

This show there is a supply demand gap for our market. With the start of Rapid this will actually be an advantage to CCM in particular as it already has a facility plant in Pasir Gudang (which they currently in the process of expanding to prepare the sudden expected demand surge from Rapid in 2019). The other main caustic soda player, Malay Sino has 2 plants located in Lahat (Perak) and Kemaman (Terengganu).

Investor will need to faced the volatility at the moment due to the trade war rhetoric between China and US.

2Q18 result is expected to show improvement vs 2Q17 result as have shown by other Chemical company in malaysia and globally.

Debt will actually significantly reduce in 4Q18 via the proceeds of disposal of 3 parcel of land in Shah Alam to Global Vision for RM190mil and the disposal of Pangen Biotech to CCM Diopharma for RM59.2mil. Both disposal was completed back in 2Q18.

Assuming no other debt to be raised, net debt should fall to around 40-50mil only which translate to a net gearing of 0.16x.

Feel free to comment. Appreciate any other views or input on this company.

Thanks.

Hi guys,

If i am not mistaken, it doesn't really matter if Gamuda accept or not the offer.

The offer by Pengurusan Air Selangor is actually for Syarikat Pengeluar Air Sungai Selangor Sdn Bhd (Splash Sdn Bhd) who is a wholly own subsidiary of Syarikat Pengeluar Air Selangor Holdings Berhad (Splash Holding).

Gamuda actually holds 40% of Splash Holdings with the rest being held by Sweet Water Alliance (30%) and KPS (30%). Basically now the deal is almost certain to go through as the majority shareholder of Splash Holding has agreed to sell Splash Sdn Bhd. I don't think Gamuda can do anything about it.

Please refer to the announcement made by KPS.

http://www.bursamalaysia.com/market/listed-companies/company-announcements/5770525

Regards

Hi upsidedown,

Thanks for the explanation. Hope the stock will go up to compensate investors that have been very patient for this deal for a long time.

Like what ks5S highlighted, KPS did provide a special dividend when they had disposed of Kumpulan Hartanah Selangor Berhad back in 2013. Hope they will do the same this time around.

http://www.theedgemarkets.com/article/kps-declares-special-dividend-27-sen

Enjoy your weekend guys.

Hi guys,

It seems that KPS and Sweet Water Alliance has already agree to the deal. Both of them hold a 60% interest in Splash. Basically the deal should go through even if for some reason Gamuda decides to reject it. Right?

http://www.malaysia-chronicle.com/?p=126622

Regards.

Hi guys,

Just wanted some confirmation on the value of the deal. The total offer for Equity Splash sdn bhd + Redeemable Unsecured Loan Stock = Rm2.55bil. Assuming that the 350mil RULS is valued at RM1/ unit, this would mean that the total book value of the RULS is RM350mil (assuming interest payment is made everytime its due. If interest paymemt is accumulated, then the value should be higher).

This means that the equity offer for Splash Sdn Bhd is actually rm2.55bil - rm350mil = RM2.2bil. This represent a 38% discount to Splash Sdn Bhd book value of rm3.54bil.

Is my understanding correct? Appreciate any input on the matter.

Regards.

Hi guys,

Just wanted some confirmation on the value of the deal. The total offer for Equity in Splash sdn bhd + Redeemable Unsecured Loan Stock = Rm2.55bil. Assuming that the 350mil RULS is valued at RM1/ unit, this would mean that the total book value of the RULS is RM350mil (assuming interest payment is made everytime its due. If interest paymemt is accumulated, then the value should be higher).

This means that the equity offer for Splash Sdn Bhd is actually rm2.55bil - rm350mil = RM2.2bil. This represent a 38% discount to Splash Sdn Bhd book value of rm3.54bil.

Is my understanding correct? Appreciate any input on the matter.

Regards.

Hi tanflash,

Not sure if it is still relevant for you (since you ask this for almost 2 months).

I should not be too worried on the issue of cash flow. Yes, you are right to indicate that the net cash flow for operation is - RM29mil (cash outflow) for FY2018. However, if you look at the reason for the net cash outflow it is mainly due to the company's decision to increase the inventory level (which is normal given the new Bukit Mentajam factory that just started operation back in 3Q18).

The trade receivable has also increase from RM135mil recorded in 4Q17 to RM177mil in 4Q18. But if you look at the FY2017 annual report, you will see that 85% of the trade receivables is categorise as "neither past due nor impaired". I would only start to worry if the trade receivables categorise under "past due for more than 30 days" increased substantially. As of 4Q17 that category only represent 4.4% of the total trade receivable value. We will need to see the breakdown for FY2018 when the annual report comes out.

Regards

Anyway, i believe any acquisition would have to be at a higher price. During the AGM back in May, Dato Abdul Rahim (the chairman and also shareholder of Med Bumikar Sdn Bhd) mentioned that in order for UMW to take MBMR private, they will need to get at least 95% shares approval (i actually thought UMW needs only 90%). He doubt that UMW can get it at the offer price of RM2.56.

Hi Hafid and ladahitam,

Feel free to correct me if the info below are less than accurate.

I think what ladahitam means is upon the completion of the acquisition of MBMR by UMW, there is an opportunity for the UMW to list Perodua given that it will end up with a total of more than 70% interest of Perodua.

However, I doubt that UMW (or in this case its major shareholder PNB) would want to do that. One of the main reason is that UMW currently have a valuation of around 20x fwd PE. If they want to do an IPO, it would only make sense if they can get a valuation of more than 20x for Perodua. Another roadblock for an IPO would be Daihatsu which UMW need to convince (contrary to some news reports, an acquisition of MBMR by UMW does not actually need approval from Daihatsu given that the entity that UMW is planning to acquire is actually MBMR and NOT Perodua. Daihatsu does not have any say in the selling and buying of MBMR shares).

I believe that the main reason for UMW to acquire MBMR is mainly for the balance sheet, future growth earning as well as the healthy cash flow that the company can provide to UMW (all of this will mainly come from Perodua). Cash flow is especially important for UMW given some of the projects that they currently taking like the Rolls Royce fan casing manufacturing are expected to have negative cash flow for the foreseeable future.

At the offer price of RM2.56 per share, UMW acquisition will only translate to around 8.8x 12 months trailing PE (excluding all the impairment that occurred last year). Even if they increase the offer to RM3, for example, this will only translate to 10.4x 12 months trailing PE which is only half of what UMW is trading at the moment. In terms of P/B, an offer of RM2.56 will only translate to a valuation of 0.7x P/B (as of March 2018). An offer of RM 3 will translate to a valuation of 0.8x P/B. If the acquisition is completed, UMW can actually post a gain of acquisition amounting to RM290mil to RM440mil in their P&L for FY2018 (if they can complete it before end of the year).

In summary, the real reason to why UMW want to acquire MBMR is mainly because the valuation that the company is trading at the moment is really cheap for a profitable company with steady cash flow.

Regards.

Expect 2Q18 results to be higher compared to last year's mainly driven by the higher sales of Perodua vehicle. For the 2nd quarter 2018, Perodua managed to record a sales of 61,530 units vs last years 50,169 units.

I am still surprise that the market is still only valuing MBMR at around 8x PE compared to other automotive vehicles that currently trading at an average of around 15x fwd PE.


Regards.

https://www.theedgemarkets.com/article/umw-one-step-closer-perodua-bid-court-rules-appointments-invalid

Now Med Bumikar will need to negotiate with UMW on the deal. Analysts view that UMW will need to increase their offer if they want to take the company private given that they will need to get at least 90% shareholders approval. Analyst value the company at between RM2.84 - RM3.30.

Hi Guys,

Can anyone clarify the deal between EATECH and HESS on the FSO Mekar Bergading?

Extract of 22 May 2018 announcement:

"E.A. Technique have agreed to deliver and fully handover the FSO Mekar Bergarding at Malaysia Marine and Heavy Engineering (“MMHE”) yard in Pasir Gudang such that HESS may complete the final phases of construction, transportation, and installation of the facility." ...........

"Total costs are still to be finalised due to ongoing negotiations with sub-contractors, but the Settlement will reverse a portion of the provision for foreseeable losses. "......

How much exactly is EATECH getting from HESS? From my understanding it will be equal to the cost of construction by MMHE + some of the losses incurred by EATECH with regards to the project.

Is this right? Thanks appreciate the input.

http://www.bursamalaysia.com/market/listed-companies/company-announcements/5797453

Hi joeshare,

Went through the full list of china products targeted by US tariff. None of the CCM products are in the list. The targeted products are actually from high tech industries mainly from advanced information technology, robotics, aircraft, new energy vehicles, pharmaceuticals, electric power equipment, advanced materials, agricultural machinery, shipbuilding and marine engineering and advanced rail equipment industries.

Refer to link below (there is a direct link to the full 1,300 products targeted by US).

https://www.straitstimes.com/asia/east-asia/us-publishes-list-of-1300-chinese-goods-to-be-targeted-by-tariffs

Thanks.

By far the cheapest automotive company in Malaysia which is a bit weird given that Perodua is the market leader. They should be valued at a premium compared to other automotive companies.

Anyway more upside expected for their bottom line going forward with better sales driven by the new Myvi sales and the zero rated GST period as well as the introduction of their new SUV in 3Q this year.

Their wheel alloy business is also expected to turn around (in FY19) with the help of their new strategic partner, Citic Dicastal, China largest alloy wheel manufacturer. Citic is planning to use MBMR to help prevent anti dumping tariff imposed by the EU since May 2018 till 2023. Target is to produce 50,000 to 60,000 units of alloy wheels per month in 2019. So hopefully there will be no more losses from this division (and if lucky, they can even make some profit out of it).