MBM Resources - Promising Outlook Despite Short Term Glitch

MBM’s earnings shortfall was largely due to Hirotako’s and OMI’s lower contributions, hit by the drop in airbag production volume from Proton. Daihatsu earnings were clipped, a result of its Delta trucks’ phase-out. We trim our earnings estimates for FY12/FY13/FY14 by some 17%/12%/6% respectively, though FY12 top line remains unchanged as the earnings drop was largely due to lower margins. Nonetheless, the automotive group’s prospects remain encouraging. With valuations rolled over to the lowered FY13 numbers and pegging Perodua at a higher PE of 11x given its market dominance, our FV is raised to RM4.76 from the previous RM4.58, based on the sum of parts. Maintain BUY.

Trimming estimates. MBM’s 1H2012 earnings announced last week fell short of estimates, accounting for only 36% of our full year forecast of RM196m vs consensus’ RM162m. The earnings shortfall was attributed to the lower than expected earnings contributions from Hirotako and OMI, hit by the drop in airbag production volume from Proton. Daihatsu earnings also fell short as a result of the phase-out of the Delta trucks. We summarise key takeaways of it analysts briefing below:

Hirotako drags earnings. Hirotako’s lower than expected contribution was largely attributed to the sharp drop in production volume from Proton, of which dropped by some 18.6% y-o-y in 1H 2012. This was a result of strict lending guidelines that dented overall vehicle sales, due to the slower loan processing times and declines in the approval rate. However, production is expected to ramp up for both national carmakers head of the festive season. Loan processing times, too, have since improved and coupled by additional airbag volume orders expected, following the compulsory dual airbag policy effective 1 July. This will boost Hirotako’s overall production volume and earnings over the remaining 2H2012. Management hopes to see an additional RM5m per month (roughly translating to RM30m in revenue or a 22% increase) from the dual airbag fitment, as the current fitment rate for the Viva and Saga models is only at 60%.

OMI takes a hit too, but expects better 2H2012. The steep drop in production volume from Proton also took a toll on OMI, due to the decline in steel wheels manufactured, which added pressure on margins. As we pointed out earlier though, 2H2012 earnings are expected to improve as production ramps up.

OMI’s outlook is promising. MBM hopes to secure alloy wheel orders from Perodua; 60% of the latter’s alloy wheels are currently imported due to the poor local quality standards. All the Alzas and only 70% of Myvis are currently fitted with alloy wheels; the Viva is still on steel wheels. The company is in talks to allocate 30% of alloy wheel production for export, notably for Europe’s replacement market which garners better margins. The first phase of the alloy wheel line is expected to commence early next year and we are convinced Perodua will be its first customer. However, earnings contribution from this line will not be too substantial as the management emphasized on a quality product finish rather than banking on high production volume. Hence, utilization rate is expected to hover at 50%-60%. Upon completion of its OMI plant in 2015, OMI is expected to bring in an additional RM150m in annual revenue. The facility is expected to operate at full capacity from 4Q2015 onwards. The company also intends to continue expanding its steel wheel production as it is actively looking to produce steel wheels for eco cars in Thailand.

Federal Auto to see a better 2H2012. Federal Auto is expected to see higher sales volume as a result of two upcoming new launches soon, both of which are expected to see encouraging demand. We also note that the withdrawal of Swedish Marque as Volvo’s Malaysian distributor was due to the Geely takeover, which resulted in heavy price discounting. This has also cushioned the volume upside for Federal Auto. Numbers are expected to improve as MBM’s Federal Auto now handles a bigger market share following Swedish Marque’s withdrawal from distributing Volvo vehicles, aside from taking in the maintenance and servicing business previously handled by the latter.

Expanding service centers. One way for MBM to boost its margins is to ramp up its vehicle sales volume, achieved through higher vehicle sales incentives from principals and revved up business from its after-sales and maintenance services. It will continue expanding its distributorship network for Federal Auto moving forward (notably for Volkswagen and Volvo), which has already been aggressively growing its market share.

Delta trucks’s phase-out takes toll on Daihatsu earnings. The phasing out of Delta light trucks resulted in a a big dent in volume for Daihatsu vehicle sales. Daihatsu’s margins also eroded as a result of the stronger yen. Although sales took a hit, earnings from Hino improved as a result of higher sales of its light trucks, which were also distributed by Daihatsu.

Perodua sees better margins on improved sales and higher localisation. As a result of higher sales and localization efforts, coupled with the Myvi’s higher vehicle mix which fetches relatively better margins than the Viva, Perodua saw its earnings improve despite the JPY appreciating 5% y-o-y. Earnings over the subsequent quarters are set to improve, too. This also bodes well for UMW. Perodua’s potential replacement of its overdue Viva is yet to be known, but we suspect it could be sometime in 2013. It remains to be seen whether the Perodua Sedan will land on Malaysian streets as it is only at a feasibility study stage with Daihatsu. The sedan model, if launched, could be a success as Perodua is not yet represented in this segment.

Bookings remain encouraging. Bookings remain encouraging, with an average one-month waiting period for all its vehicle line-ups. More encouragingly, Volkswagen’s and Hino’s average waiting period stands at two and two and a half months respectively.

Assembly division remains to be seen. MBM remains tight-lipped on its plans to set up an assembly line, gained from Kinabalu Motor’s acquisition. This is the last piece of the puzzle which will enable MBM to become a complete automotive group operating across all supply chains.

Trimming earnings but we maintain a BUY call. Factoring in the lower than expected earnings from Hirotako and OMI, we trim our earnings estimates for FY12/FY13/FY14 by 17%/12%/6% respectively. In view of the lower earnings, we have also shaved our dividend forecasts to 6sen/9sen/12sen respectively over FY12-FY13 in view of its onerous capex. Despite the earnings reduction, we continue to maintain our BUY call. With valuations rolled over to the lowered FY13 numbers, pegging Perodua at a higher PE of 11x given its market dominance and lowering Hino’s PE to 6x from 8x, our FV is raised to RM4.76 from RM4.58 previously, based on the sum of parts. The FV implies a forward PE of 10x of FY13 earnings, in line with the sector average, which we think is fair as MBM becomes an integrated automotive player. Maintain BUY.

Source: OSK