MBM Resources - Exploring other forms of collaboration?

The MoU for MBM’s planned 20% stake sale in Daihatsu Malaysia Sdn Bhd (DMSB) to existing partner Mitsui has been allowed to lapse. MBM currently holds 72% of DMSB, with the remaining held by Mitsui. 

The sale would have raised cash of RM75mil. While this would have been useful for MBM’s massive expansion into vehicle assembly, we note that the absence of such cash will not have a detrimental impact on MBM and such plans are still largely intact. 

Post-recapitalisation, MBM stands on a much stronger footing to raise debt to finance any expansion plans – equity base expands by close to 10% while net gearing drops to 13% from 21% (FY12F). 

The cancellation of the sale may in fact trigger an upward earnings revision by the market, which has largely factored in dilution of MBM’s stake in DMSB post-stake sale. DMSB contributes circa 20% to MBM’s pre-tax profit. 

More importantly, we understand that both parties are exploring other forms of collaboration. Our check with management suggests that discussions are still on-going and as such, no details are forthcoming at this juncture. 

We believe any collaboration may involve expansion of the Hino/Perodua dealerships in the country. We also do not rule out both parties exploring setting up an auto financing arm, which may be parked under DMSB – to facilitate sales transactions amid tight loan approvals in the market. We see this as an important counter-measure given that Perodua sales have been affected by tighter loan guidelines since January 2012 – sales volume dropped 1% YTD, with mainly lower end models, e.g. Viva, being negatively impacted.

We maintain our BUY call on MBM with  an unchanged SOP-derived fair value of RM3.60/share, which implies 9x FY12F earnings – still at a conservative 10% discount to sector. Key near term catalysts: (1) Newsflows on vehicle assembly expansion in the next 6 months; (2) Stronger-than-expected earnings from Hirotako given improving revenue/car set; (3) undervalued stake in Perodua (20% direct stake) – implied value of 7x FY12F earnings.

Source: AmeSecurites