MBM Resources - A strong 2H12 comeback? Buy

- We re-affirm our BUY rating on MBM Resources, following its results briefing last Friday. Our SOP-derived fair  value is maintained at RM4.70/share. Below are some key takeaways from the briefing:-

- In 2Q12, the Proton Preve suffered initial production hiccups (launched April), which are now resolved. The Preve has since recorded strong bookings of over 11K units vs. 3K-4K in May, suggesting production will soon catch up with the strong sales. Perodua should also see an improvement in the absence of a week-long maintenance in 2Q12 and underpinned by 17K-18K booking bank (maintained 1-month waiting list since May).

- Exceptionally low production-to-sales ratio in 1H12 (70%-90% vs. 95%-105% in normal years) reflects industry measures to manage inventories. In particular, DRB was conservatively running down Proton’s inventory, post-acquisition in March. A sustained strong demand environment underpinned by  2 consecutive months of strong TIV since May and strong booking trends suggest improved demand visibility –underpinning a production recovery.

- Hirotako should see an earnings gap-up in 2H12 as the compulsory dual airbag requirement takes off. Key drivers are the Saga and Alza models – both are volume models for Perodua and Proton (22% and 50% of respective marques’ monthly volumes). This will be coupled with recovery of Preve production which carries higher-than-average revenue/car set (RM1,100 vs. RM800 for other Proton models).

- Federal Auto (FA) will be launching new dealerships in 2H12. This comes on the back of strong VW sales growth (+104% YTD) and FA’s new position as the sole Volvo dealer in 2H12. FA’s Volvo sales took a hit in 2Q12 given aggressive discounting by Wearnes to clear existing stocks ahead of its exit as a Volvo dealer. FA also expects to launch two new models by year-end. 

- OMI’s plant is 45% completed (scheduled for year-end completion) with initial capacity of 250K/annum, building up to 1mil/annum by 2015. Perodua is a natural customer as 60% of its alloy wheels are imported. OMI is also looking at higher margin exports to Europe (30% of capacity allocated) while steel wheel production will remain. Interestingly,  OMI is exploring prospects of supplying steel wheels to the largest Japanese OEM in Thailand. 

- MBM remains our top sector pick and our projections are maintained. More importantly, our core thesis remains intact despite the 2Q12 earnings glitch: (1) Strategic business model re-engineering via expansion into vehicle assembly which will drive valuations closer to peers’ average of 13x; (2) A deeply undervalued stake in Perodua (8x FY12F earnings).  

Source: AmeSecurities