We initiate coverage of MBM Resources (MBM) with a BUY call and
a fair value of RM5.80/share. Our sum-of-parts derived valuation implies 9x
FY12F earnings, a conservative 10% discount to sector PE of 10x. Our high
conviction BUY on MBM is premised on several factors: (1) A strategic business
model re-engineering; (2) A close to quadrupling of core earnings base by FY13F;
(3) A deeply undervalued stake in Perodua.
A structural valuation re-rating is imminent from the
current low base PE of 7x (sector average: 10x) as MBM breaks out of the investment
co stigma tagged to it (given that 70% of earnings is currently derived via
associates). MBM is on the verge of a major business model transformation, from
a mere investment company into one with a complete vehicle assembly, distribution
and parts making capacity, akin to that of DRBHicom, UMW and Tan Chong. These
auto manufacturing incumbents are currently trading at 40%-90% premium to MBM’s
depressed valuation (See Table 4).
The building blocks of such an infrastructure are in place:
(1) Comprehensive vehicle manufacturing license via the acquisition of KMASB
and LMSB in 2010; (2) A ready distribution network via 40 strong outlets
nationwide, which are easily expandable; (3) Part making capacity in SRS
products and wheels which can attract 2%-3% localization rate, on top of 10%-15%
localisation derived from local assembly.
Post recapitalization, MBM will be on a stronger footing to
gear up for massive expansion. An estimated RM105mil proceeds from the rights
issue will lower MBM’s net gearing to 12% (from 20% FY12F) and expand equity by
8%. We estimate MBM has the capacity to raise RM1.1bil to finance construction/acquisition
of assembly plants and expand distribution capacity. Potential assembly
capacity of 60K-70K/annum (our estimates) can position MBM at par to DRBHicom
and Naza (See Table 5). We believe MBM is next to be thrusted into the
local-foreign partnership spotlight after NazaPeugeot and DRB-VW.
In the near-to-mid term, a close to quadrupling of core
operating profits - from RM42mil in FY11 to RM155mil in FY13F should catalyze
strong re-rating of the stock. The 23% FY11-13F core earnings CAGR will be
driven by the (1) Expansion of auto parts manufacturing division; (2) Expansion
of VW dealership network to ride on the principal’s massive expansion within
the next 3 years; (3) MBM’s maiden expansion into alloy wheel manufacturing.
Finally, we think MBM’s effective 23.5% stake in Perodua is deeply
undervalued. At current market cap, MBM’s stake in Perodua is valued at just 6x
FY12F earnings (net of MBM’s direct 20% stake), half of UMW’s (the other local
shareholder of Perodua with a 38% stake) valuation of 12x. Notably, Proton is being
privatised by DRB at 28x forward earnings.
Source: AmeSecurities
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