MBM Resources - Mazda commences JV talks - MBM thrusted into the spotlight? BUY

- We re-affirm our high conviction BUY on MBM, with a higher fair value of RM4.70/share (vs. RM4.30/share previously) upon raising our SOP valuation for its auto businesses (ex-Perodua) to 10x (from 8x previously),  closer to peers’ valuation of 13x. This is to reflect increased newsflows on MBM’s potential JV partners and franchise wins from its maiden expansion into vehicle assembly – which will elevate its status from a mere dealership operator to a major assembler and distributor carrying multiple brands.

- Mazda Corp and Bermaz Motors have agreed to begin talks on the establishment this year of a joint venture for a production and sales company in Malaysia. It is said that the new JV project plans to begin local assembly of the Mazda CX5 (an SUV model) in early 2013 at a rate of 3,000 units a year. Mazda considers Malaysia as one of its key markets in ASEAN alongside Thailand and Indonesia. Mazda’s Structural Reform Plan has set a sales target of 150,000 units for the entire ASEAN region by March 2016 (Mazda’s YE March). 

- We believe MBM’s comprehensive manufacturing licence, maiden expansion into vehicle assembly and its plans to allow a partner to control its manufacturing operations may raise the possibility of the Mazda-Bermaz JV entering into serious talks with MBM. 

- Notably, BCorp does not attain a comprehensive licence on its own to manufacture <1.8litre passenger cars. While Mazda is currently using Inokom’s plant for its Mazda 3 CKD, BCorp only has a 15% stake in the plant and Mazda has no stake at all. Furthermore, Inokom’s 40,000 cars/annum plant is currently running at close to 80% utilisation rate. 

- To minimise risks of the Mazda-Bermaz JV, we would not rule out the JV taking up a substantial stake in a Mazda specific manufacturing operation under MBM’s vehicle assembly operations (See Chart 1), whereby production can be scaled out over MBM’s multiple assembly JV partners (still in the works). A strong balance sheet (post rights issue FY12F net gearing of 12%) allows MBM substantial room to leverage up for its expansion into vehicle assembly. 

- MBM remains as our key sector pick, given its structural transformation into a major assembler and distributor – riding on an influx of foreign marques into the country. The stock is deeply undervalued, trading at a 30% discount to manufacturing incumbents such as TCM, UMW and DRB which trade at 13x FY12F earnings. Newsflows on assembly JV partners and new franchise wins in the next 6 months should catalyse a strong re-rating. 

Source: AmeSecurities