MBM to gain from earnings recovery
Maybank IB Research 
MBM Resources holds a 22.6% stake in Perodua

MBM Resources is asserted to be a deep value play. Its share price has already fallen 40% from the peak of RM3.29 in June 2015, reflecting weak earnings in the past few years. 

At FY18F price/book value of just 0.48 times, MBM is already trading at trough valuations. More importantly, MBM’s deeply undervalued stake in Perodua positions it as a prime acquisition target, in our opinion.

After a fall in FY17F earnings impacted by Myvi run-out, weak auto parts and dealership volumes as well as the weak ringgit, Perodua is at the core of MBM’s solid 39% year-on-year (yoy) earnings recovery given the group owns a net 22.6% stake in the country’s second national car brand.

The expectation of fresh contribution from Perodua’s new model launches and an expansion into the SUV segment led to our forecast for the brand’s earnings to rise 13% in FY18F.

MBM’s auto parts manufacturing (mainly airbags/seatbelts/steering/wheels) and Perodua dealerships are spillover beneficiaries of Perodua’s new launches in the next 12-14 months.

Late last year, Perodua’s management guided for its FY17F total industry volume to contract by 3.5%. The bearish guidance is likely due to the negative impact from the run-out of the current generation Myvi, the lack of new models for the first three quarters of the year and the impact of consumers holding back purchases in anticipation of the new Myvi in Q4FY17.

Furthermore, the strong ringgit against the yen is positive for Perodua’s margins since they are under a technical partnership with Japan’s Daihatsu Motor Corp. Initiate coverage for MBM with a buy and target price of RM2.45. 

This article first appeared in Focus Malaysia Issue 259.