MBM Resources (MBM MK; BUY; TP: MYR3.15): 4Q16 trounced expectations

We have a results note on MBM today.

MBM Resources (MBM MK; BUY; TP: MYR3.15): 4Q16 trounced expectations

• A strong jump in JV and associates’ income. A 70% QoQ jump in JV and associates’ income cumulatively lifted MBM’s 4Q16 core net profit to MYR36m (record profit in the last 14 quarters) to surprise the market on the upside.  We lift our FY17/18 net profit forecast marginally by 1%-3% on higher associates’ income and introduce our FY19 earnings forecast. Rolling forward our valuations to FY18, our TP is raised to MYR3.15 (+5%) on an unchanged 10x PER peg. Reiterate BUY on MBM.
• Yet another major launch by Perodua. The story of Perodua’s success will not stop at the Bezza model as positive sentiment on Perodua-related companies should carry into  2017, riding on (i) the economical car theme amid high living  costs and (ii) the launch of a new Myvi. Also, potential job wins to supply alloy-wheels for the new Myvi could finally lift MBM’s loss-making OMI above its breakeven point, staging a meaningful earnings recovery in 2017.
• A potential M&A target? Recent restructuring exercises among large automotive conglomerates could be a catalyst for MBM, a potential synergistic M&A target, primarily for its 22.6%-associate stake in Perodua. Trading at just 8x FY17 PER and 0.6x FY17 P/BV, MBM is deep in value; further enhancing its appeal as a M&A target.  We believe that MBM’s 22.6%-effective stake in Perodua alone is worth ~MYR1.3b or MYR3.34/MBM share (based on 10x FY18E earnings of MYR577m) outweighing MBM’s current market cap by 37%.