Warrants Update: MBM Resources-WA could benefit from Axia boost

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MBM Resources Bhd’s share price has been lacklustre and on a downward spiral over the past one year with no obvious earnings catalyst in the pipeline. It has tumbled from a 52-week high of RM3.71 a year ago to RM2.85 last Wednesday, slightly higher than its 52-week low of RM2.68.

However, that could change with the strong sales of the Perodua Axia, with bookings now estimated to have exceeded 46,000. MBM Resources has a 20% stake in Perusahaan Otomobil Kedua Sdn Bhd (Perodua), which in turn contributes about 70% of the former’s profit before tax.

Last Wednesday, MBM Resources closed at RM2.85, valuing it at nine times its trailing 12-month earnings. However, a better way to tap into its upside potential could be through the company’s warrants.

MBM Resources-WA is an American call warrant with a strike price of RM3.20. At last Wednesday’s closing price of 42 sen, it was valued at a 27% premium to the mother share. It has plenty of life left, expiring only in June 2017, which justifies the premium.

At the same time, the relatively high exercise price means that the warrants have a high implied leverage as well — between eight and nine times, assuming the premium stays the same.

That means if MBM Resources’ share price rebounds by 5.6% to RM3, assuming the premium for the warrants remains unchanged, the warrants should trade at 63 sen apiece, or a 50% gain.

Looking back at MBM Resources’ earnings, contributions from Perodua fell 9% for the 12 months ended June 2014 compared with the previous corresponding period. This was mainly due to weaker sales volumes in the first half of the year, as the automotive market was flooded with new launches by Honda and Toyota.

At the same time, many customers had been holding back from buying new cars, waiting for the launch of the Axia and Proton’s Iriz.

The Axia is the first real new model from Perodua since the launch of the Alza in 2009. The carmaker had only been updating its flagship Myvi. Dealers say the popularity of the Axia is even cannibalising the sales of the higher-margin Myvi.

The Axia should continue to sell well because of its low price and fuel efficiency. As earnings are only recognised when the cars are delivered, the impact of the new model should be more evident over the next two quarters.

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This article first appeared in The Edge Malaysia Weekly, on November 17-23, 2014.