This article first appeared in The Edge Financial Daily on January 23, 2019

MBM Resources Bhd
(Jan 22, RM2.58)
Maintain buy with an unchanged target price of RM3.80: It was reported in The Edge weekly that MBM Resources Bhd is looking to sell its loss-making alloy wheel manufacturing plant under its wholly-owned unit OMI Alloy (OMIA). OMIA has been loss-making since it began operations in financial year 2012 (FY12). Most of OMIA’s volume is currently generated from supplies to Perodua Bezza, Axia, MyVi and the upcoming Aru, with some exported for the replacement market overseas. It is unclear whether the plan is to dispose of the asset on a piecemeal basis or sell OMIA as a whole. There is no timeline indicated for selling OMIA’s plant.

OMIA’s previously planned tie-up with China’s Citic Dicastal has apparently fallen through as Citic was reportedly not keen to proceed with the partnership. The joint venture was meant to add indicative monthly volumes of 20,000 to 25,000 for OMIA via a contract manufacturing arrangement. OMIA registered a net loss of RM38 million for FY16 on the back of just RM26 million in revenue. Though there were increased volumes from Perodua over the years, this was insufficient to turn around OMIA. Revenues increased further to RM34 million for FY17 but OMIA remained in the red, registering a core net loss of RM29 million, excluding a RM62 million impairment.

On a positive note, removing the alloy wheel plant operations will eliminate about RM30 million in annual losses from OMIA, which would improve MBM’s earnings by some 18%, based on our existing FY19 forecast. Excluding OMIA, MBM’s parts manufacturing division still houses its steel wheel manufacturing, wheel and tyre assembly and Hirotako’s safety system and acoustic parts manufacturing units.

MBM had taken a total of RM62 million impairment on its alloy wheel plant in FY16 and FY17, relative to its initial investment of RM103 million. OMIA as a company entails a negative shareholders fund of RM179 million as at end-FY17 — inclusive of the RM62 million impairment taken — against total liabilities of RM224 million and a total asset of RM45 million. OMIA’s plant is situated on a 79,920 sq m land in Serendah with a book value of RM31 million at end-FY17. — MIDF Research, Jan 22