MBM Resources Bhd is turning out to be more than an automotive player. It has plans to develop a piece of prime land that is located near Mid Valley City and next to the Federal Highway.
MBMR, which owns a 20% stake in second national carmaker Perusahaan Otomobil Kedua Sdn Bhd (Perodua) and is its major dealer, announced to Bursa Malaysia on Oct 19 a plan to develop a commercial project on the land. But the announcement did not generate much interest in MBMR’s stock. This is probably because the location of the land was not made very clear. The land is actually where Volvo’s flagship showroom is situated — at Lot 15 Jalan Klang, which is within walking distance of Mid Valley City. It is freehold and measures 5,213 sq m. It is currently owned and occupied by MBMR’s indirect subsidiary Federal Auto Holdings Bhd. The latter is the main dealer for Volvo cars and is 69.6% owned by Galaxy Waves Sdn Bhd, a wholly owned subsidiary of MBMR.
MBMR has said it intends to develop the land with Federal Auto and Pembinaan Teknikhas Sdn Bhd, a company linked to MBMR’s director Aqil Ahmad Azizuddin. MBMR and Federal Auto will together own 70% of the project (MBMR 30% and Federal Auto 40%) while Pembinaan Teknikhas will hold the remaining 30%. “The plan is expected to enable MBMR and Federal Auto to realise the value of the prime piece of property. It will also enable Federal Auto to continue to stay at this site when the project is ready,” says an auto analyst with K&N Kenanga.
According to MBMR’s annual report for the financial year ended Dec 31, 2005, the land and the Volvo showroom on it had a book value of RM9.65 million, or about RM172 per sq ft. This means the value of the property accounted for a quarter of MBMR’s cost of investment in Federal Auto, which comes up to about RM36.3 million.
A development plan is still on the drawing board but given the size of the land, an office tower project may best suit management’s objective to maximise the value of the land and ensure recurring rental income for the company. It is learnt that the company is looking at a gross development value of about RM200 million, and may benchmark the project against the commercial office space in Mid Valley City. The group may sell half the space to recover part of the development cost and retain the other half for leasing purposes.
“The project should be well received based on the good take-up rate for Mid Valley currently. The office market in the vicinity of Mid Valley still has much potential. We can expect an average selling price of close to RM450 psf,” says the analyst with K&N Kenanga.
Financing should not be a problem for MBMR, which effectively has a 70% share in the project. The group has been able to generate strong cash flow from its Perodua dealership business. For the nine months ended Sept 30, it generated an operating profit before working capital charges of RM53.68 million and net operating cash flow of RM58.85 million. Group borrowings amounted to RM71.8 million against shareholders’ equity of RM653.31 million.
MBMR is taking its time to deliberate on the development project, which may only be completed in three years. It is worth noting that the company has signed a memorandum of understanding, which is valid for two years, with Federal Auto and Pembinaan Teknikhas. However, given the scant information available, the potential of the development project has not reached the attention of investors.
Based on its closing price of RM2.88 last Wednesday, MBMR is being valued at less than 10 times its FY2005 earnings and about seven times the consensus FY2006 earnings of 42.5 sen per share or RM91.3 million, according to AmResearch. Moreover, the stock is trading at only slightly higher than its net tangible assets per share of RM2.75 as of Sept 30.
Both AmResearch and Hwang-DBS Vickers have a “buy” rating on MBMR with respective target prices of RM3.40 and RM3.55. This is premised on the group’s strong earnings potential from its participation in Perodua. “Given the group’s earnings visibility and the likely successful regional play [as Perodua expands its sales to the export market], we deem current valuations of seven times FY2006 earnings and six times FY2007 earnings undemanding,” says Hwang-DBS Vickers in a recent note to clients.
Nevertheless, analysts’ evaluation of MBMR probably does not reflect the potential of the commercial development project on its Jalan Klang land.
MBMR’s plans to venture into property investment would likely diversify its revenue streams, which are now predominantly from the car retailing business and its 20% stake in Perodua.
