MBM Resources - Sets the ball rolling, on the verge of strong valuation re-rating BUY

- We re-affirm our BUY call on MBM and maintain our fair value of RM5.40/share, following the announcement of its maiden venture into vehicle manufacturing last Friday. Our SOP valuation continues to peg MBMs’ stake in Perodua at 12x and the rest of its auto businesses at 10x FY13F earnings.

- MBM has entered into a 42:58 JV with Hino Motors Ltd (Japan) to establish Hino’s first manufacturing plant in Malaysia (in Sendayan, Negeri Semblian), under a JV company to be called  Hino Motors Manufacturing (Malaysia) Sdn Bhd. The JV entails a total investment of RM140mil (MBM’s 42% share: RM59mil) involving land acquisition, plant construction and line capacity. MBM currently owns a 42% stake in Hino Motors (Malaysia) – franchise holder of the Hino brand in Malaysia. 

- The plant (to commence construction in Feb 2013 for completion by the beginning of 2014) will have an initial capacity of 10K/annum, covering the full range of Hino vehicles – small, medium and heavy-duty trucks and buses for the Malaysian market. Hino vehicles are currently contract-assembled by UMW Toyota. Hino controls a 9% share of the local commercial vehicle market and has seen sales volume more than double over the past 3 years, i.e. from 3,014 units in 2009 to  6,362 (2012 annualised).

- We estimate that the JV will rake in annual revenue of c. RM90mil and circa RM6mil in net annual earnings (based on 10K volumes and RM9K assembly charge, 12% IRR). We estimate RM2.6mil earnings accruing to MBM (for its 42% stake), which should enhance FY14F earnings by 1.4%.  We have yet to factor this into our projections pending further details from management.

- Notably, the initial 10K capacity is estimated to account for less than 15% of the 42-acre land – suggesting significant room to leverage off this asset for a much larger assembly capacity. At full land utilisation, we estimate total capacity of circa 70K-80K per annum. We do not rule out new franchise wins together with assembly rights further out, particularly in the passenger car segment, which should see a more meaningful earnings impact (vs. the Hino venture as MBM already holds Hino’s distribution rights in Malaysia). 

- More importantly, the deal marks the start of MBM’s venture into vehicle manufacturing and should kick-start a  strong valuation re-rating off a depressed base of 7x FY13F earnings, as it moves up the valuation vs. being a mere dealership operator and parts manufacturer at present. For comparison, incumbent manufacturers such as TCM, UMW and DRB are trading at 11x-13x FY13F earnings. Additionally, MBMs’s take in Perodua continues to be undervalued. At current market cap, implied valuation of MBM’s 20% direct stake in Perodua is a mere 3x FY13F earnings.  

- We re-affirm our BUY call on MBM and maintain our fair value of RM5.40/share, following the announcement of its maiden venture into vehicle manufacturing last Friday. Our SOP valuation continues to peg MBM’s stake in Perodua at 12x and the rest of its auto businesses at 10x FY13F earnings.

Source: AmeSecurities