MBM Resources - Earnings falls short, but past bottom Buy

- We maintain our BUY call on MBM, with a lower fair value of RM5.20/share (vs. RM5.40/share previously) given downward earnings revisions in this report following the announcement of its 3Q12 result. Our SOP valuation still pegs MBM’s core earnings and Perodua earnings at 10x and 12x, respectively.

- MBM reported a net profit of RM36mil for 3Q12, which brings 9M12 earnings to RM106mil. The results were short of expectations, accounting for 64% of our FY12F earnings and 68% of consensus.

 

- While we had expected earnings to bounce back strongly in 2H12, the recovery was dragged by slower vehicle sales in 3Q12 – particularly in August and September as the market saw an overhang from expectations of a vehicle excise duty cut in Budget 2013 (which did not materialise).  TIV dropped by 3% QoQ in 3Q12. We have trimmed earnings by 5%-10% for FY12F-14F to reflect more conservative sales targets (mainly FY12F, for MBM’s various dealerships). Perodua associate earnings, however, were well in-line with expectations.

- On the bright side, 3Q12 marked an inflection point off the weak results in 2Q12 (net profit: +20% QoQ). Industry production recovered by 2% QoQ following an exceptionally weak 2Q12 (which was dragged by plant closures and Proton’s decision to run down inventories). 3Q12 production recovery benefitted MBM’s part manufacturing division, which accounts for 76% of group EBIT.

- Furthermore, we gather from industry sources that sales volumes have recovered off the weak Aug-Sep period. The absence of duty cuts in 2013, coupled with the Ministry’s official indications of the absence of any plans to cut duties to bring down car prices will see pent-up demand return to the market in 4Q12. Any recovery in October TIV serves to underpin our view. 

- Meanwhile, any aggressive discounting by industry players to hit sales targets in 4Q12 should drive production rate higher, and this should support further recovery of MBM’s parts manufacturing division, which accounts for the bulk of group EBIT. 

- OMI’s alloy wheel plant is in the final stages of completion and is expected to be commissioned early 2013. Management expects the plant to break-even next year, with initial customer being Perodua, which currently imports 60% of alloy wheel requirements. 

- From a valuation standpoint, MBM remains cheap at 7x FY13F earnings. At current market cap, MBM’s 20% stake in Perodua is valued at just 4x FY13F PE, a deep discount to sector PE of 10x. MBM remains our top sector pick.  

Source: AmeSecurities