MBM Resources - Assembly newsflows to pick up, Proton Preve boost BUY

- We re-affirm our BUY rating on MBM Resources (MBM) with an unchanged fair value of RM5.80/share, following  a meeting with management yesterday. Several areas of key focus during the discussions were:- (1) Expansion into vehicle assembly; (2) Hirotako prospects; (3) Relevance of MBM’s stake in Perodua.

- In the near-term, we anticipate a pick-up in newsflows on its expansion into vehicle assembly to drive MBM’s structural re-rating. Management indicated that it prefers a greenfield setup (a 12 month-timeframe) to better manage capacity outlay. A successful execution could see MBM partnering multiple OEMs, akin to DRB-Hicom’s business model.

- We would conservatively expect initial volumes to range around 10K-20K/annum via initial exposure to the lower risk commercial vehicle segment, before a massive expansion into higher volume passenger cars. MBM’s balance sheet capacity should be able to accommodate up to 70K/annum assembly capacity in the longer run.

- Additionally, MBM has ready land to house its plant and plans to allow principals/partners to control its manufacturing operations, a structure successfully adopted by Perodua and UMW Toyota. This should reduce initial capital outlay, eliminate quality issues and significantly reduce MBM’s break-even risk on investment. We anticipate newsflows on the assembly front to kick start within the next 3-6 months. 

- On the auto parts front (Hirotako), we were positively surprised to find that revenue/car set for supply to Proton Preve is circa RM1,100, at the higher end of a typical range of between RM700-1,200. Proton Preve is projected to garner 54,000 unit sales annually, which we estimate would account for up to 30% of Proton’s TIV and is expected to achieve 100% airbag fitment rate. The Preve is scheduled to be launched this month. 

- MBM’s stake in Perodua continues to be deeply undervalued at an implied 6x FY12F earnings. UMW (which holds 38% of Perodua) currently trades at 12x FY12F earnings, at a whopping 100% premium vis-à-vis MBM. MBM provides acheaper access into Perodua and more importantly, such valuation disparity raises the possibility of a consolidation of local shareholdings in Perodua. 

- As MBM breaks out of its investment company stigma (70% of earnings is currently derived from “non-cash flow enhancing” associates) via exponential growth of its core earnings in the mid-term (via expansion into vehicle assembly & distribution and growth at its auto parts division), valuations should re-rate closer to sector PE of 10x from the current depressed valuation of 7x.   

Source: AmeSecurities