This article first appeared in The Edge Financial Daily on October 9, 2018

MBM Resources Bhd
(Oct 8, RM2.06)
Recommend buy with a target price (TP) of RM3.40: MBM Resources Bhd’s growth remains intact with a higher sales volume expected from Perodua and a potential turnaround of its alloy wheel business. We recommend “buy” with a TP of RM3.40 based on 11 times its financial year 2019 (FY19) price-earnings ratio (PER) premised on its five-year average PER.

MBM’s multi-brand strategy for motor trading division includes the distributorship of Daihatsu, Iveco, Hino as well as the operations of over 30 automotive branches under Volvo, Volkswagen, Hino, and Perodua. MBM’s strong presence lies in its 20% stake in Perodua, which leads the automotive market share at 37%. Driven by top affordable models such as Myvi, Axia, and Bezza, coupled with the upcoming launch of the Perodua sport utility vehicle, we expect MBM’s earnings to grow further from higher sales volume.

Meanwhile, contribution from Auto Parts Manufacturing segment is expected to improve as its alloy wheel unit — OMI Alloy — is on track to break even in FY19. Via the strategic partnership with Citic Dicastal (CD), the world’s largest alloy wheel maker in 2017, the group can leverage on CD’s expertise to increase its operational efficiency. CD will also utilise up to 50% of OMI Alloy’s capacity to supply wheels for export markets such as India and Europe. Hence, OMI Alloy is looking to ramp up its production capacity to one million units per annum in 2019 from the current 750,000 units per annum.

Despite recording a loss in FY17, MBM’s net profit for first half of FY18 surpassed its FY16 net profit, reinforcing better efficiency control by management. Currently trading at an undemanding 6.6 times its FY19 PER, we believe MBM’s valuation remains attractive on the back of solid contribution from the motor trading segment especially from Perodua and a potential turnaround from OMI Alloy. — Rakuten Research, Oct 8