MBM Resources - Updates on MBM Manufacturing BUY

- We re-affirm our BUY rating on MBM, with an unchanged fair value of RM5.40/share, following a chat with management recently regarding its vehicle manufacturing JV with Hino. 

- We gather that the recently-announced JV with Hino (refer to report dated 1 Oct 2012 for details) will utilise a brand new licence dedicated for Hino. Under the 2009 NAP review, holders of new licences are allowed to manufacture any type of commercial vehicles. We reckon MBM’s “old” comprehensive licence parked under 70%-owned Kinabalu Motor Assembly will be better utilised for the manufacture of passenger cars as this is where its value lies – new licenses only allow manufacturing of >1.8 litre passenger cars, priced >RM150K.

- The land to be acquired in Sendayan Tech Valley will be fully utilised for Hino as in the foreseeable future, part of the land will be utilised as Hino’s stockyard, which will consume a large amount of space. If required to expand capacity, the stockyard can be moved elsewhere in the future. Production capacity of 10K/annum is in-line with Hino’s target of achieving c.10K unit sales in 2014. This will be driven by the launch of a new line of light truck models, i.e. the Hino 300 series back in April. YTD12 annualised sales stand at 6,361 units and 2013 sales is targeted to be in the range of 7K-8K before rising to 9K-10K in 2014.

- In regard to the business model, the JV will assume costs of CKD kits on top of assembly cost and in return, sell the finished products to Hino Motors (Malaysia) to be distributed to dealers and branches. This means margins achieved by the JV could be a lot lower than earlier expected given a higher cost base (and revenue pass through) from CKD kits, but absolute earnings should be higher than our earlier estimates (of RM2.6mil/annum), which strictly assumed a contract assembly business model. Our back of the envelope estimates suggest a 4-5% enhancement to FY14F earnings with a RM10mil/annum contribution from the JV.

- More importantly, we would not underestimate the spillover benefits to MBM’s parts manufacturing businesses in providing localisation for Hino. Three potential beneficiaries are Summit (100%-owned commercial vehicle upper body manufacturer), OMI (78%-owned steel wheel manufacturer) and Hirotako (100%- owned safety systems manufacturer). We estimate a 1%-3% enhancement to the respective unit’s revenues from potential supplies to Hino. In the meantime, we leave our projections unchanged until there is more concrete visibility on the JVs earnings prospect.

- We remain bullish on MBM for its strategic move up the value chain, which may involve new franchise wins and assembly rights, particularly in the high volume passenger car segment going forward.  Such announcements within the next 12 months should serve as strong share price catalysts, considering MBM’s deeply-discounted valuation of 7x FY13F earnings vs. peers’ 11-13x.

Source: AmeSecurities