MBM Resources Bhd(Oct 12, RM3.40)
Maintain buy at RM3.45 with a fair value of RM5.40: We re-affirm our “buy†rating on MBM, with an unchanged fair value of RM5.40, following a chat with the management recently regarding its vehicle manufacturing joint venture with Japan’s Hino Motors Ltd.
We gather that the recently announced JV with Hino (refer to our report dated Oct 1 for details) will utilise a new, dedicated licence for Hino. Under the 2009 National Auto Policy review, holders of new licences are allowed to manufacture any type of commercial vehicle.
We reckon MBM’s “old†comprehensive licence, parked under 70% owned Kinabalu Motor Assembly Sdn Bhd, will be better utilised for the manufacture of passenger cars. This is where its value lies — new licences only allow the manufacture of less than1.8-litre passenger cars, priced at less than RM150,000.
The land to be acquired in Sendayan Tech Valley in Negri Sembilan 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 10,000 per year is in line with Hino’s target of achieving circa 10,000 unit sales in 2014. This will be driven by the launch of a new line of light truck models — the Hino 300 series — back in April. Year-to-date annualised sales stand at 6,361 units and 2013 sales is targeted to be in the range of 7,000 to 8,000 before rising to 9,000 to 10,000 in 2014.
The JV will assume the costs of CKD kits over and above assembly cost, and in return sell the finished products to Hino Motors (M) Sdn Bhd 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 RM2.6 million per year), which strictly assumed a contract assembly business model.
Our back of the envelope estimates suggest a 4% to 5% enhancement to forecast financial year 2014 (FY14F) earnings with a RM10 million per year contribution from the JV.
More importantly, we would not underestimate the spillover benefits on MBM’s parts manufacturing businesses in providing localisation for Hino. Three potential beneficiaries are Summit Vehicles Body Works Sdn Bhd (100% owned commercial vehicle upper body manufacturer), Oriental Metal Industries (M) Sdn Bhd (78% owned steel wheel manufacturer) and Hirotako Holdings Bhd (100% owned safety systems manufacturer).
We estimate a 1% to 3% enhancement to these units’ revenues from potential supplies to Hino. In the meantime, we leave our projections unchanged until there is more concrete visibility on the JV’s earnings prospects.
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.
Such announcements within the next 12 months should serve as strong share price catalysts, considering MBM’s deeply discounted valuation of seven times FY13F earnings against peers’ 11 to 13 times. — AmResearch, Oct 12
Source
