MBM Resources - FY12 fraught with challenges, FY13 looking like a better year BUY

- We maintain our BUY call on MBM but lower our fair value to RM4.60/share (from RM5.20/share) following its 4Q12 results last night. Our SOP valuation continues to value MBM’s stake in Perodua at 12x and other businesses at 10x FY13F earnings.

- MBM’s 4Q12 results missed our expectation but were within consensus estimates. The group reported net profit of RM30mil for its 4Q12, bringing FY12 earnings to RM135mil, accounting for 91% of our FY12 estimate.

- Associate earnings (made up of Perodua and Hino) were well in in line with our expectation, but core operating profit disappointed. A key reason for the deviation is weaker than expected growth from the parts manufacturing division i.e. reduced contribution from major manufacturers, as OEMs adjust for year-end stocks.

- Additionally Proton, which is Hirotako’s key customer, saw a 1% QoQ drop in sales and the Preve (which entails high airbag content) was probably badly impacted by the launch of a new competing model by a Japanese marque in 4Q12. MBM reported a 16% QoQ decline in earnings from the manufacturing division on the back of a 2% decline in manufacturing revenue.

- Besides, Hirotako, OMI (steel wheel manufacturer) is also taking in initial losses from its new steel wheel plant (c. RM8mil in FY12). Nonetheless, the plant is scheduled to be up and running in 2Q13.

- In the motor division, DMMS (Perodua dealership operated by MBM) saw its sales volume increase 10% QoQ. However, Federal Auto (operates VW, Volvo, Mitsubishi dealerships and collectively estimated to generate slightly larger earnings than DMMS) saw sales contract 4% QoQ,

- Despite the negatives in 4Q12, we are pretty confident that earnings prospects could be at the cusp of a turnaround driven by: (1) Weaker JPY to boost Perodua earnings – every 1% change in JPY is estimated to impact bottomline by 2% (Perodua estimated to account for 60% of MBM’s bottomline); (2) Perodua will also benefit from vendor cost down initiatives – our chat with certain part manufacturers suggests up to 15% reduction in parts prices to Perodua; (3) Commissioning of alloy wheel plant in 2Q13 – Perodua is a likely initial customer given that 50% of its alloy wheel requirements are currently imported; (4) Mitsubishi to embark on local assembly in 2H13 which means more competitive pricing – our channel checks suggests production targets of 12K-15K a year (vs. c. 4K Mitsubishi passenger car sales in 2012).

- Management is holding a 4Q12 results briefing next week (4th March) to give more insight into 20-13 prospects.

Source: AmeSecurities