MBM Resources - Temporary drag from weak production and stronger Yen BUY

- MBM announced its 2Q12 results last night. The group reported net earnings of RM30mil for its 2Q12, which brought 1H12 net profit to RM71mil. This accounts for 42% of our full-year estimate and 43% of street estimates – and the results would appear to have missed expectations. 

- Earnings dropped by 28% QoQ despite a 13% QoQ increase in revenue. A key negative surprise was the drop in MBM’s associate earnings – which is largely driven by Perodua. Despite Perodua’s 8% QoQ increase in sales volume, contributions from associates actually dropped, dragged by a stronger Yen. We also suspect that Perodua’s strong sales volume came at the expense of aggressive marketing and promotional costs, given the shift to drive more MyVi sales instead of the lowest-end Viva model as a strategy to move around stricter lending guidelines.

- The second and more important issue was the drop in industry production, which negatively impacted MBM’s parts manufacturing division. While total industry production only dropped by 1% QoQ, MBM’s key customers – Perodua and Proton – registered a 6% and 4% QoQ drop in production. This came despite an actual 8% QoQ rise in both Proton and Perodua sales volume.

- Our chat with industry players suggests that there are no longer constraints in obtaining parts supply. We understand that Perodua underwent a week-long plant maintenance sometime in 2Q12 which dragged production rate, while Proton faced production issues in the initial phase of its launch of the Preve. 

- Reflecting the situation, industry production-to-sales ratio actually dropped to as low as 71% in May and ranged between 80%-90% for most parts of the year. In comparison, in normal years, i.e. in 2009 and 2010, production-to-sales ranged between 95%-110%. We believe the issue with the slower production could be temporary and is a measure to manage inventory both at the assemblers as well as at the dealership level. A much-better industry sales visibility, underpinned by strong bookings and new launches now, suggests that production could see a strong rebound in 2H12 and the drag in manufacturing earnings could be reversed significantly in 2H12. 

- We maintain our earnings projection at RM167mil (FY12F) and MBM remains our top pick in the sector for its expansion into multi-partnership vehicle assembly (which should drive a strong valuation re-rating closer to peers’ valuation of 13x) as well as a deeply-undervalued stake in Perodua (implied valuation of 9x FY12F earnings).

Source: AmeSecurities