FW: Post briefing update: MBM Resources (MBM MK; BUY; TP: MYR2.75) - Value for money

 

MBM Resources (MBM MK; BUY; TP: MYR2.75): Value for money

• Straight to work. In the first analyst briefing hosted by MBM’s new CEO, Encik Nor Hadi bin Daud, and CFO, Ms Annie Chin, management wasted no time by addressing concerns of continuous losses at its 78%-owned OMI operations. Elsewhere, cost cuts and management restructuring, especially in the motor trading division, were undertaken since early-2017 and should contribute to better results gradually. We make no change to our earnings forecasts, MYR2.75 TP (10x FY18 PER) and BUY rating on MBM for its exposure to Perodua.
• Employing the right strategies. We like that management is cost conscious, especially in current challenging times (i.e. soft demand and high costs due to a weak MYR). Rationalisation of non-performing dealerships, group cost cuts and management redeployment were amongst the first steps to improve the fundamentals of the company and we expect MBM to come out leaner and meaner in the coming quarters.
• Key focus remains on 78%-owned OMI. Priority is on OMI which has been a drag to the group for a prolonged period. Currently, the plant remains underutilised with just 50% utilisation, serving Perodua, its largest customer; domestic demand accounts for 80% of its alloy-wheel demand while the remaining 20% are exported. We keep our forecasts and expect OMI to remain in the red for this and next year but on narrower losses, aided by stronger demand when Perodua launches the new Myvi in 4Q17. This major launch should also lift associates’ contribution. Meanwhile, we caution on an earnings blip prior to the new Myvi launch from heavy discounting and clearance.
• Undemanding valuations. Realistically, we expect MBM to only report significant improvement in earnings in 1Q18. Nonetheless, MBM is currently very much undervalued; its 22.6% effective stake in Perodua alone is worth ~MYR900m (based on 10x PER to estimated earnings of MYR45m in FY17), above MBM’s current market cap. Other prized assets include the 42%-stake in Hino Motor Malaysia and a green-field manufacturing license, among others.