Thursday 21 June 2012

MBM Resources - Accelerating capex underpins core earnings expansion BUY


- It is reported in local dailies this morning that MBM will accelerate its planned capex. The group had earlier announced a RM250mil capex to be  spent between 2011-2015. Circa RM50-60mil had been spent in 2011, while the remaining will now be spent in 2012-2013.

- 70% of the RM250mil allocation will go towards MBM’s new 1mil wheels/annum alloy wheel manufacturing plant in Rawang (via 78%-owned Oriental Metal Industries – JV with Toyotaowned parts making companies). The plant will be ready by year-end and the initial customer is expected to be Perodua (which is currently importing 60% of its alloy wheel requirements).

- We estimate that expansion into vehicle assembly may require a further RM600-RM700mil capex – assuming an assembly capacity of 60K-70K per annum. However, MBM will likely embark on multiple JVs to achieve such a volume and that the partners may acquire a majority stake in the assembly & manufacturing operations given MBM’s lack of experience in this area. As such, actual capex to be borne by MBM could be much lower. 

- Nonetheless, we believe MBM will maintain control of vehicle distribution, for which it may largely bear the capex. MBM is already spending RM75mil (as part of the RM250mil capex) to expand its dealership network. We believe there will be further expansion upon MBM securing new JV partners/principals. Each basic sales outlet is estimated to cost between RM7-12mil. 

- Investors’ perception of MBM as a mere investment company (70% of bottomline is derived via associates Perodua & Hino) has been dragging its valuation for years. The expansion into vehicle assembly and investments to expand into alloy-wheel manufacturing underpins a structural expansion of cash flow enhancing core earnings – which should drive a significant re-rating of the stock. MBM currently trades at just 7.7x FY12F earnings, while auto manufacturing peers such as DRB-Hicom, Tan Chong and UMW trade at 11-14x FY12F PE.

- We re-affirm our high conviction BUY call on MBM, with an unchanged SOP-derived fair value of RM3.60/share, which implies a conservative 9x FY12F earnings versus sector PE of 10x. Key catalysts: (1) Newsflows on new JV partners for vehicle assembly is expected to pick up in the next 6 months; (2) Stronger-than-expected sales of Proton Preve which drives Hirotako’s earnings.

Source: AmeSecurities

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