MBM Resources Berhad: Navigating Transition with Dividends and ROCE Gains

In a sector grappling with the shift toward electric vehicles (EVs) and intensifying competition, MBM Resources Berhad (KLSE:MBMR) stands out as a company making deliberate strides toward profitability and capital efficiency. Once mired in losses, the Malaysian automotive parts and motor trading firm has turned a corner, leveraging sustainability initiatives and a shareholder-friendly dividend policy to position itself for long-term resilience. Yet, investors must weigh its progress against persistent risks in an evolving industry.

From Red to Black: The ROCE Turnaround

Five years ago, MBMR reported losses, but today it boasts a net profit of RM333 million in FY2024, marking a full recovery to profitability. While its ROCE of 0.5% (calculated as EBIT of RM14 million divided by capital employed of RM2.63 billion) remains far below the retail distributors industry average of 8.9%, the trajectory is critical. The ROCE has improved dramatically from negative territory, reflecting better capital utilization as the company stabilized operations and scaled investments.

Though the ROCE is still low, the transition from losses to profitability signals management's success in trimming inefficiencies. The firm's focus on core businesses—motor trading and auto parts manufacturing—has maintained a 13% net margin, consistent with prior years, even as revenue grew 2.9% YoY to RM2.49 billion. This stability suggests operational discipline, though reinvestment into growth areas like solar panel installations and digitalization (e.g., IoT and SCADA systems) has yet to spark the kind of capital efficiency seen in peers.

Dividend Potential: High Yield, High Caution

MBMR's dividend policy is its strongest allure. The final single-tier dividend of RM0.09 per share for FY2024, with a yield of 11.69%, places it among Malaysia's top dividend payers. The payout ratio of 26% appears sustainable based on earnings, but the cash payout ratio of 437% raises red flags. This mismatch suggests reliance on debt or cash reserves to fund dividends, a risk if cash flows falter.

Analysts project a future yield of 8.6%, tempered by concerns over cash flow sustainability. For income investors, the high yield is tempting, but they must monitor whether the firm can align cash generation with payouts. A special dividend of RM0.05 per share in 2023 highlights management's willingness to return capital, but consistency is key.

Sustainability as a Strategic Anchor

MBMR's push into renewable energy and carbon reduction—including solar panels at manufacturing sites and Scope 3 emissions tracking—aligns with global trends. These steps not only meet regulatory demands but also reduce operational costs over time, potentially boosting margins. The adoption of ISO 14001 certifications underscores a commitment to environmental stewardship, which could enhance brand value and customer loyalty in an ESG-conscious market.

Risks Looming on the Horizon

Despite progress, challenges loom large. The automotive sector faces EV disruption, which could erode demand for traditional auto parts. While MBMR has not yet pivoted to EV components, its focus on maintenance and repair services (a steady cash flow generator) buys time to adapt. Additionally, Malaysia's high inflation and competitive pressures from regional players could squeeze margins further.

The firm's 2 warning signs, including a high cash payout ratio and a 2.5% share price decline in recent weeks, warrant vigilance. Investors should also consider the industry's 16% revenue growth forecast for Asian retail distributors, compared to MBMR's modest 1.4% projected growth—a gap that could widen if capital efficiency doesn't improve.

Investment Takeaways

• For income investors: MBMR's 11.69% dividend yield offers compelling income, but prioritize monitoring cash flow health and capital allocation.
• For long-term holders: The transition from losses to profitability and ESG integration suggest a foundation for future growth, though ROCE must rise to match.
• Avoid if: You seek high capital returns or cannot tolerate cash flow volatility. EV disruption and industry outperformance risks are material.

Final Verdict

MBM Resources Berhad is a high-risk, high-reward play for income-focused investors willing to bet on its dividend discipline and operational stability. While ROCE lags peers, the company's turnaround narrative and shareholder-friendly stance offer a rare income opportunity in a challenging sector. However, success hinges on management's ability to boost capital efficiency and adapt to EV trends—key tests in the years ahead.

Investors should proceed cautiously, diversify holdings, and stay attuned to cash flow dynamics and industry shifts.