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This article first appeared in The Edge Malaysia Weekly on January 21, 2019 - January 27, 2019

AUTOMOTIVE group MBM Resources Bhd is throwing in the towel on its bleeding alloy wheel manufacturing business and wants to sell the manufacturing plant in which it had invested over RM100 million.

A previously announced tie-up with Chinese alloy wheel maker Citic Dicastal — meant to spur a turnaround by lifting sales and boosting cost efficiencies — has now fallen through, says executive chairman Datuk Abdul Rahim Abdul Halim.

“We have discussed with the Chinese party and in the end, they are not keen (on the tie-up). So we have decided to close it (the plant) because the break-even point is still quite some distance away and we are looking for a buyer,” he tells The Edge.

The plant has been loss-making since it began operations in 2012. Much of the initial RM103 million investment had been impaired over the past couple of years, Abdul Rahim adds.

In its 2017 annual report, MBM said it impaired a collective RM61.9 million on the alloy wheel plant for the financial years 2016 and 2017, ended Dec 31.

The key issues have been high rejection rates, production inefficiencies and low utilisation rate at the plant, which is designed to produce up to a million alloy wheels a year.

It also struggled with low selling prices and insufficient sales volume, despite supplying to second national carmaker Perusahaan Otomobil Kedua Sdn Bhd (Perodua).

“The losses (at the alloy wheel plant) have narrowed a lot because Perodua supported us, but that support is still insufficient,” Abdul Rahim says via telephone.

Note that MBM owns a 22.58% stake in Perodua, the best-selling carmaker in Malaysia with about 37.9% total market share as at November 2018.

A much anticipated sales take-up by Citic Dicastal would have resolved the volume issue, given the Chinese company’s reported global market share of 23% and export reach into Europe, US and India.

“Under the agreement, Citic Dicastal will utilise circa 50% of OMI’s (MBM subsidiary Oriental Metal Industries) 750,000 (per annum) capacity to supply wheels to Europe, India and Malaysia,” Affin Hwang Capital said in a research note last month.

Disposing of the plant would likely lift the financial performance of MBM’s auto parts manufacturing arm, under which the alloy wheel business is housed. Apart from alloy wheels, it also produces safety products as well as noise, vibration and harshness products.

Historical data shows that the auto parts manufacturing arm has been posting annual operating losses for four consecutive financial years beginning FY2014.

A local auto analyst who declined to be identified opines that a successful sale of the alloy wheel business would relieve MBM from the burden of turning around the operations and allow it to refocus on its motor trading business.

 

Room to rally

Losses at the alloy wheel manufacturing business aside, MBM is on course to return to the black after a loss-making FY2017.

It reported a net loss of RM145.1 million in FY2017 despite a 3% improvement in revenue to RM1.72 billion. Prior to that, its annual net profit had been declining for three consecutive years.

In the nine months ended Sept 30, 2018 (9MFY2018), MBM recorded a net profit of RM105.47 million, up 146% year on year, as revenue improved 10.9% y-o-y to RM1.43 billion.

That puts it on course to record revenue of RM1.87 billion and a net profit of RM135.4 million for FY2018, according to average estimates of nine analysts tracking the stock.

If the estimates are achieved, it would mean MBM’s best annual financial performance in five years.

The 9MFY2018 figures, released on Nov 22, sparked a share price surge from its closing price of RM1.87 that day. Last Friday, MBM ended trading at RM2.57, marking a 37.4% rally since Nov 22.

Despite the rally, most analysts tracking the stock generally see further upside. All nine analysts tracking MBM have a “buy” call, with target prices ranging from RM2.60 to RM4.50 per share. It is worth noting that some of the target prices were last updated in December amidst the rally.

A second analyst The Edge spoke to said catalysts for the counter include Perodua’s expected financial performance improvement in 2019 thanks to new model launches, namely sports utility vehicle Perodua Aruz and a likely all-new Perodua Alza.

MBM’s fortunes are tied to Perodua’s on two layers — MBM receives a share of income thanks to its associate stake in Perodua, and it also distributes Perodua models via its 51.5% unit DMM Sales Sdn Bhd.

For shareholders, a better financial performance by MBM may improve the chances of getting a higher dividend quantum after a dip in FY2017.

When asked,  Abdul Rahim declined to give an indication as the board has not decided on the matter. MBM declared a first interim payout of 3 sen for 1HFY2018.

Historically, MBM pays out between six and eight sen per share annually but only distributed three sen per share in FY2017.

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