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

Stock Name: MBMR
Company Name: MBM RESOURCES BHD

Research House: AMMB

Price Call: BUY

Target Price: 5.80

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

- In the near-term, we anticipate a pick-up in newsflows onits 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 MBMpartnering multiple OEMs, akin to DRB-Hicom's business model.

- We would conservatively expect initial volumes to range around10K-20K/annum via initial exposure to the lower risk commercial vehiclesegment, before a massive expansion into higher volume passenger cars. MBM'sbalance sheet capacity should be able to accommodate up to 70K/annum assemblycapacity in the longer run.

- Additionally, MBM has ready land to house its plant and plansto allow principals/partners to control its manufacturing operations, astructure successfully adopted by Perodua and UMW Toyota. This should reduceinitial capital outlay, eliminate quality issues and significantly reduce MBM'sbreak-even risk on investment. We anticipate newsflows on the assembly front tokick start within the next 3-6 months. 

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

- MBM's stake in Perodua continues to be deeply undervalued atan implied 6x FY12F earnings. UMW (which holds 38% of Perodua) currently tradesat 12x FY12F earnings, at a whopping 100% premium vis-''-vis MBM. MBM provides acheaperaccess into Perodua and more importantly, such valuation disparity raises thepossibility of a consolidation of local shareholdings in Perodua. 

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

Source: AmeSecurities