MBM Resources - Proxy to strong traction in Proton and Perodua sales

-  We re-affirm our high conviction BUY on MBM with a higher fair value of RM4.30/share (vs. RM3.60/share previously), following a recent meeting with management. Our sum-of-parts valuation now pegs Perodua at 12x FY12F earnings (vs. 10x previously) to reflect its strong earnings traction, underpinned by a strong TIV rebound in the recently-announced May numbers.

-  Post-meeting, we raise FY12-14F earnings by 7%-9% premised on:- (1) Higher revenue/car set for parts supplies and higher volume target for Proton Preve; (2) Execution of compulsory airbag fitment in 2H12; (3) Increase in Volvo sales from 2H12 onwards. Our projections are now 4%-5% higher than consensus and an upward earnings revision is a key re-rating catalyst in the near-term.

-  Proton Preve (launched on 16 April 2012) has generated bookings of over 11,000 units – a rapid improvement versus 4,893 bookings in April and far exceeding Proton’s monthly sales target of 4,500 units. On top of strong volumes, parts supplies to the Preve entail a much higher value of RM1,100/car vs. a typical RM800/car given a higher airbag content. This should drive an earnings gapup for Hirotako from 2Q12 onwards. 

-  Additionally, the compulsory dual airbag fitment, which was delayed due to negotiations between auto makers and regulators, is finally taking off in 2H12. Key models that will drive airbag take-up are Perodua Alza and Proton Saga (40%-50% fitment rate currently). These are high volume models accounting for 22% and 48% of Perodua and Proton’s total volumes, respectively. 

-  Perodua bookings stand at 18K-19K with the bulk comprising the MyVi – marketing efforts have shifted to the MyVi which entails a better loan approval rate.  May TIV saw Perodua’s shift in strategy bearing fruit, with volumes rising 20% MoM. The rising volumes will be accompanied by margin improvement given a better model mix (more MyVi in the sales mix) and stronger margins commanded by the new MyVi (vs. the prior generation). We see room for earnings revisions for Perodua in the coming months.

-  Key catalysts: (1) Consensus earnings revisions – our projections are now 4%-5% above consensus over FY12F-14F; (2) Newsflows on expansion into vehicle assembly picking up in the next 6 months; (3) Stronger-than- expected auto sales recovery; (4) Potential introduction of new models by Perodua; (5) An undervalued stake in Perodua – implied valuation of 6x at current market cap vs. sector PE of 10x (See Table 2); (6) Potential M&As. MBM is now positioned as a proxy to recovering Proton and Perodua sales.

Source: AmeSecurities