Revisiting MBM Resources’ dependence on Perodua

This article first appeared in The Edge Malaysia Weekly, on December 2, 2019 - December 08, 2019.
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LAST Thursday, MBM Resources Bhd closed at RM3.94 — more than double what it was worth a year ago as earnings climbed to record highs, spurring its share price to record levels.

For shareholders, the question now is how much further its share price may climb as the company stays on track to a year of record-high earnings.

So, how will management leverage the turning tide in the business environment to address its longstanding business model quandary — its dependence on national carmaker Perusahaan Otomobil Kedua Sdn Bhd (Perodua)?

MBM Resources declined a request for an interview and had not responded to queries from The Edge at the time of writing.

MBM Resources has a 22.58% shareholding in Perodua and enjoys a share of its income. It also relies on Perodua for a sizeable proportion of its dealership segment.

However, it is not easy for MBM Resources to diversify from its dependence on Perodua. Its last attempt, by way of venturing into alloy wheel manufacturing, did not go well and led to a RM226.9 million operating loss in its financial year ended Dec 31, 2017 (FY2017).

The losses were mainly due to impairments made between FY2016 and FY2017, totalling RM61.9 million. Its overall investment costs were RM103 million. In January this year, MBM Resources told The Edge it was seeking to sell the manufacturing plant.

That said, the company is returning to stronger financial health, which may pave the way to revisiting the concentration risk.

So far, MBM Resources is on pace for a record year in FY2019. It reported RM221 million in pre-tax profit (+52.78% y-o-y) from RM1.59 billion in revenue (+13.97% y-o-y) in the first nine months of FY2019 (9MFY2019).

For the full FY2019, the company is projected to hit RM2 billion in revenue and RM251.6 million in pre-tax income, based on mean estimates from all nine analysts compiled by Bloomberg.

Hitting those estimates would mean a new high for pre-tax income while RM2 billion in revenue would be the company’s highest in seven years since its last turnover peak of RM2.27 billion in FY2012.

Also notable is that MBM Resources’s core business operations are showing clear signs of recovery in 9MFY2019, although margins remain razor thin due to a weak auto market. Operating profit (pre-tax income sans share of income from associates and joint venture) came to RM65.3 million, representing an operating profit margin of 4.1% in 9MFY2019.

If MBM Resources sustains its financial performance, a 4.1% operating profit margin would be the highest since it recorded the same margin in FY2012. To put that into perspective, its operating profit margin since then had fallen to as low as 1%, with negative margins in FY2016 and FY2017 due to heavy losses and impairments.

The core business recovery in 9MFY2019 shows in the proportion of MBM Resources’s profit sources. In the nine-month period, share of income from associates and joint ventures total RM155.69 million or 70.45% of pre-tax profit.

In comparison, MBM Resources had seen that proportion rise to as high as 96.4% in FY2014. Between FY2016 and FY2017, the company recorded operating losses that were supported by Perodua’s contributions (see table on Page 34).


Shareholders vindicated

The recent share price performance may be seen as vindication of shareholders who refused to sell when UMW Holdings Bhd sought to buy a 50.5% stake in MBM Resources at RM2.56 per share in March last year.

Twenty months since UMW’s first offer, MBM Resources’s share price has even exceeded what some resisting shareholders thought was a fairer valuation of RM3.68, the company’s net tangible asset (NTA) value at the time.

Up to Nov 28, MBM Resources had risen by 113.8% over the preceding 12 months and had a market capitalisation of RM1.51 billion. As at Sept 30, 2019, its NTA stood at RM4.36 per share.

In August, it breached the RM4 threshold for the first time, rising  from RM1.89 on Nov 30 last year, and went on to hit an all-time high of RM4.39 on Sept 11 — a rally of 132.2% in under 10 months.

And there may be more room for appreciation. All nine analysts tracking MBM Resources have “buy” recommendations on the counter while target prices range from RM4.50 to RM6.35 or between 14.21% and 61.17% higher than the stock’s  closing price on Nov 28.

To recap, on March 9, 2018, UMW offered RM2.56 per share for a 50.5% stake in MBM Resources held by Med-Bumikar Mara Sdn Bhd with an eye to privatising the company if the offer were accepted.

To be fair, the offer price was a 13.3% premium to MBM Resources’s five-day volume-weighted average market price up to March 6.

In an interview with The Edge, UMW confirmed that the underlying target was MBM Resources’s 22.58% stake in Perodua. UMW had a 38% stake in Perodua and taking over MBM Resources would effectively give it majority shareholding in the national carmaker.

But Med-Bumikar’s then-management rejected the UMW offer. In an interview, its management told The Edge the offer undervalued MBM Resources and that a fairer benchmark was its NTA of RM3.68.

However, some of Med-Bumikar’s own shareholders were in favour of cashing out and a shareholder tussle ensued to seize management control in order to accept the UMW offer.

The proposed acquisition also saw multiple deadline extensions for accepting the offer and complications that included Daihatsu Motor Co Ltd — a 30% shareholder in Perodua — threatening to walk away if the proposed acquisition proceeded. Daihatsu is Perodua’s technology partner.

After spending much of last year in a holding pattern, UMW eventually relented and allowed its offer to lapse in October last year.



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