Oct 29, 2011

MBM Resources - Eyes on HIRO

BUY RM3.10  Price Target : 12-Month RM 3.90
Proposed acquisition of Hirotako 
•  MBM offers RM0.97/share cash to buy 100% in HIRO 
•  Premium pricing but LT earnings accretive 
•  Maintain Buy with TP RM3.90 for its attractive valuation and sound fundamental

mhb-chart-financial-data MBM Forecast and Valuation

Offering RM0.97/share for HIRO.  MBM Resources (MBM) has proposed to acquire all voting shares and outstanding warrants in Hirotako Holdings (HIRO) at RM0.97/share and RM0.05/warrant with an acceptance condition of >65% stake in HIRO. These represent 14% premium to HIRO’s 5-day market average closing prices of RM0.85/share and 5% above the warrant’s exercise price of RM0.92/share. Total consideration amounts to RM412.5m. Listing status of HIRO would be removed once MBM holds 90% or more of HIRO. This is expected to complete by 1Q12. 

Premium price tag. The acquisition price tag is not cheap, valuing HIRO at 11x FY11 PE, which is at the high end of its historical trading band (slightly above +2 SD for PE and P/BV) (Figure 2). However, the acquisition will be earnings accretive (+11-14% to FY12F after deducting interest cost assuming 60% loan financing) as well as help speed up expansion of MBM automotive business with wider product offering in the airbags and steering space. We think the acquisition is likely to go through given the attractive price tag. Meanwhile, there is no indication if HIRO’s management will stay to run the business.

Attractive valuation; Maintain Buy.  MBM is trading at 1-year forward PE of 4.6x or -0.5 SD from historical mean PE. Sound fundamental with RM162m net cash and trading below 1x P/BV valuation. Assuming 60% loan financing, MBM’s net gearing remains manageable at 21% after acquisition. Maintain Buy with TP RM3.90 based on 6x FY12 PE.  

by HWDBS Vickers