MBM Resources Bhd group managing director Looi Kok Loon talks about transforming the group into one of the key automotive players in Malaysia and the region.
StarBizWeek: Are your plans a little bit more ambitious than your current resources?
Looi: Generally, I do not look too kindly on my subsidiary companies coming to me for funding. What I prefer is that the subsidiaries should be able to stand for themselves.
In the business, if you get it right, should be bankable. I can put in the capital but the rest should be from funding from the banks. If you look at Federal Auto, it has a long history and the balance sheet should be able to fund its respective expansion plan.
What the HQ should fund is acquisitions. And that is where the rights issue comes into it. We look to buy more properties and I want to build up the asset base of the group at HQ level and then the subsidiaries should focus on operations.
I am conscious there are limitations to growth. Capital constraints is one but we have gone into the capital market for the first time. The shareholders should adjust to a very different MBM today.
I have also tried to explain to shareholders in previous AGMs that we have been generally very generous in dividend payouts but I don’t think I have been very popular. Looking at my track record on dividends, I have been conserving more cash in recent years precisely for these expansion plans. The communications I been putting out to analysts and investors is that you should look at MBMR as a growth story. That cash needs to be conserved for our expansion.
I am out there to invest in our existing businesses. In terms of acquisitions, it will come when it comes. For the immediate term, we are trying to digest the business of Hirotako. Although I am not actively looking for acquisitions, the rights issue positions us for that.
In the future, any business we look at, we will look at that sort of standards in the products we want to do, where there is a lot more value add and something which entry into the market is not easy. These are businesses that can contribute towards the development of our auto industry.
In previous times, we have not spent much. Capital expenditure is investing in new plants and showrooms. I recognise our shareholders expect a regular dividend but also recognise that as we expand, I require the shareholders support as well. As a package, I am trying to thank shareholders for their support and here we are offering a good return in your investment in the company.
Shareholders are comfortable with MBM being a dividend stock. Do you expect much resistance from shareholders as you flip strategy?
I have tried to manage expectations by making presentations to shareholders where I made it clear that the dividend income cannot sustain if we do not expand our business. If we do not spend, the dividend income cannot be sustained. I believe they understand. My job in a listed company is to make sure the market appreciates this message.
We should not only talk about dividend income, we should talk about capital appreciation also. We are bringing shareholder value up. I understand the issues people talk about such as MBM shares being illiquid. I have tried to address that with the bonus shares and the rights issue. We have been quiet in previous years as we have been running on the spot. We can have a vision but the risk is in the execution.
Today, I am convinced we have got it right and we are starting to see the fruit come in. Last year, was a testament to what we got right. Despite a pretty flat market, we recorded pretty good revenue growth. But with any growth plans, there is a cost to it. I am also trying to manage expectations of the analysts. In the business world, there will be short term cost before we see the long term gain. In vision 3290, I talked about the topline. There has not been much focus on profits but there is behind the scenes which people don’t see. I want to focus on revenue growth because I want to shake us out of running on the spot and go to the next level.
But all of this comes with a cost because depreciation hit immediately when we invest in a new plant.
The OMI plant will be commissioned in November or December but we will start hiring in June. Expenses will be incurred but we need to send them for training such as understanding the engineering aspects of the alloy wheel. Our shareholders need to understand that these are costs for expansion.
The balance of probability for survival lies in favour of expansion instead of staying put?
The risk is much higher if we did nothing. Competition will come in. The steel wheel business is showing a drop in market share and the RM1.1bil might not be sustained and might even start sliding back.
In Federal Auto, the assets are unencumbered. The cost is to build the centres and generate revenue. What risk do we have for Daihatsu? We have the people, network and experience.
The risk we are taking is a measured risk. The execution risk of vehicle assembly will be significantly reduced by having the right technical partner. You cannot stinge on having to pay royalties. The expertise comes by helping reduce the execution risk and we have the best partners to help us with that. Similarly with Hirotako.
How do you proposed to go regional?
That’s why I always say you must get your home base right. Get your costs down and then you will be able to penetrate the regional market. The regional idea should be a natural extension. We should limit ourselves to the Malaysian market. We will succeed if they go the way we want it. That’s why we are going downstream into the manufacturing side to support the overall plan so we can look at the bigger picture.
What’s the time line for your assembly plant?
It’s still early as we are talking to parties on assembly. To set up a vehicle assembly plant from green field it will take generally take one to two years. Then it will take more time to build up sales volume. It is not something that’s going to improve the volumes of MBM significantly but strategically if we get that right, it will lift the profile of MBM in the longer term.
How is investor interest in MBM?
If you look at our results, it has detailed info on our performance. I have generally regular analyst briefing and meet fund managers. Judging from the turnout of (our latest) analyst briefing, it was more than the usual. If I use that as a measure, then yes. there has been more investor interest in the group.
If you go into the group companies, there is so much energy because we have communicated our vision to the employees. People are motivated. They know there is growth, career advancement and potential to move between the group’s brands. People are re-vitalised.
I am aware I should not fall into trap which is as we grow, we must always keep the entrepreneurial spirit of this company. The difference is that we are able to react to market conditions very quickly because of the entrepreneurial spirit.
For example, we talk about this after sales business. The business model tweaks very quickly. We test the market and if the market cannot take it, we are able to change that very quickly in terms of how we want to set up the business.
A principal wants to talk about expanding network. I want to set up dealership in a certain town, we ask the dealers whether we can do that. How many people can react to that fast? We must keep our entrepreneurial spirit to support our principals. Because as we grow, there are more layers of decision making and I am conscious that is our selling point: the ability to move quickly.
To declare vision 3290 in 2010 and to have those results immediately is not easy. To have done that, tribute must be given to the team for being able to translate that quickly into the numbers we have just seen.
In two years time, how would you differentiate MBMR from other auto companies?
I continue to believe its the entrepreneurial spirit and being nimble. We will always be measured against the market. Our outperformance in our results comes from those qualities. I hope people recognise the entrepreneurial spirit of the management to capture opportunities in the market and continue to record the superior growth at the expense of dividend payout.
Are those who helped chart the course of the company still around?
Of course. Very much essential to the group. Everyday, people are running around chasing numbers. The conference we had put in perspective the longer term picture. Actually we asked what are we chasing? How much more can I get from steel wheel? How many Volvo cars can I sell? How many more Daihatsu Delta trucks can I sell?
The self realisation was we reached the peak potential without changing our course.
Why issue equity when you can borrow money?
We did a simulation for different funding options. We felt the interest cost was too high for us and being a listed company. We had not tapped the market. The idea is to go to the market for fund raising. The size of the rights issue is comfortable for the first time around in the capital market. And that should really be the start.
The other potential is that we may identify a property for the dealership business where there is heavy traffic. Potentially, we could work with property developers and we be the anchor tenant.
So far, we don’t have anything in the pipeline yet on this. The more immediate need is for Johor where we will build a big body and paint centre to support our VW business. We are looking at Ipoh and Penang. In that review, we may find the size of these assets might not be sufficient for our needs and might sell some of them and buy some bigger ones.
For example, we recently secured tenant space for a future car showroom and service centre in a prime location in Desa Sri Hartamas, Kuala Lumpur. But we don’t own the land (in Desa Sri Hartamas). – Transcribed by Jagdev Singh Sidhu and Thomas Huong.