MBL (Muar Ban Lee) main businesses are machine manufacturing and edible oil milling. It’s a profitable business earning more than its required return. But, the main attraction to this stock is not its business but its recent decision to dispose its plantation subsidiary.

Disposal of Subsidiary

MBL agreed to dispose 35.1million to Everhouse Sdn Bhd. The deal is expected to be completed in 6 months. This is attractive because 35.1million is about 36% of the current market capitalization (96million). The disposal is not going to affect the core business of MLB because it is not making any profit and contributing to the company.

Allocation of excess capital

MBL stated that they are going to pay down their debt, increase working capital, and expands its core business. It is unlikely that MLB is clearing out all their debt (20m) because those debts are long term. Even if they decide to pay off all their debt, they will still be left with 15million of cash (not including 9million cash on hand). Those cash can be used to expand its core business which will benefits long-term shareholders. But there is also possibility that MLB will use the excess cash to pay dividend to shareholders, which can immediately unlock value for shareholders.

Valuation

Currently trading around 8 times earnings. It is cheap even without considering the 35million coming into the company. This valuation has two assumption. One is that the EBIAT will be 12.5million. Another one is that the subsidiary will be successfully liquidated. We think that EBIAT of 12.5million is reasonable because of the cost (operating expenses) that will be reduced after the disposal. With this valuation, it shows that the value of MBL is 190million (or RM2.06) and an enterprise multiple of 5.8x.

Final Thoughts

We do not know how they will allocate the cash. But, the odds are with us. Even if the managements fail to properly allocate the capital, we won’t lose much (not likely). If the managements manage to put the capital to good use, our return could be big. We don’t plan to analyze the business further because the main attraction of this investment is the gaming-changing disposal. I may be wrong, so please take this as an opinion and not a fact.