This article first appeared in The Edge Financial Daily on November 17, 2017

MBM Resources Bhd
(Nov 16, RM2.16)
Initiate coverage with buy and a target price (TP) of RM2.45: Our thesis is premised on: i) a deeply undervalued stake in Perodua; ii) a solid 39% year-on-year (y-o-y) earnings growth in financial year 2018 forecast (FY18F); iii) turnaround of MBM Resources Bhd’s parts manufacturing division; iv) a proxy for total industry volume (TIV) and total industry production (TIP) recovery; v) a beneficiary of the stronger ringgit;  vi) deep value play trading at less than half FY18F book value and below historical average price-earnings of nine times; and vii) a solid balance sheet at just 9% FY18F net gearing.

After a 19% fall in FY17F earnings impacted by the weak ringgit, MyVi run-out, and weak auto parts and dealership volumes given an industry slowdown, MBM Resources is set for a strong earnings recovery from FY18F (more than 39% y-o-y). Underpinning our view are: i) significant launches by Perodua in the next 14 months; ii) a recovering ringgit; iii) new model penetration by MBM Resources’ alloy wheel division; and iv) a recovery in overall industry production following sustained TIV recovery since early FY17F.

The share price has already fallen 40% from the peak of RM3.29 per share in June 2015, reflecting weak earnings in the past few years. Valuation at just 8.8 times FY18F earnings is now undemanding relative to nine times historical, while expectations are now at rock bottom. At FY18F price-to-book value of just 0.48 times, MBM Resources is already trading at trough valuations. More importantly, MBM Resources’ deeply undervalued stake in Perodua positions it as a prime acquisition target, in our opinion.

We forecast Perodua earnings to rise 13% in FY18F reflecting a fresh contribution by Perodua’s new model launches. An expansion into the sport utility vehicle segment could drive further significant growth beyond FY18F, while the strong ringgit against the Japanese yen is positive for Perodua’ margins. MBM Resources’ auto parts manufacturing (mainly airbags/seatbelts/steering/wheels) and Perodua dealerships are spillover beneficiaries of Perodua’s new launches in the next 12 to 14 months. — MIDF Research, Nov 16