Tuesday, 5 March 2013

MBM Resources - Perodua earnings gap-up, DMSB sale unlocks value BUY

- We maintain our BUY call on MBM following an analyst briefing yesterday. Our fair value remains unchanged at RM4.60/share despite factoring in the dilution of MBM’s stake in DMSB (following completion of a 20% stake sale yesterday) given upward earnings revision for Perodua and a larger proportion of Perodua’s earnings contribution to bottomline in FY13F.

- Two key factors will drive Perodua’s earnings this year. First, Perodua is a big beneficiary from the price adjustments undertaken by vendors from 1Q13 onwards. We gather from industry players that parts pricing has been adjusted lower by up to 15%, suggesting margin expansion at Perodua should they decide to keep the cost savings (FY13F net profit: +30% YoY).

- Hirotako’s earnings will be pressured from the abovementioned price adjustments, though we understand that this might be compensated by higher volume uptake by OEMs and Hirotako’s own cost efficiency measures which include lowering its own cost of materials. On balance, MBM should be a net beneficiary as Perodua accounts for >80% of group bottomline (FY13F).

- Secondly, Perodua will benefit from the weaker JPY (-18% since peak in mid 2012). This trend is a complete reversal vs. last year’s trend when the JPY strengthened against the Ringgit for most of 2012. Every 1% change in JPY:MYR will impact Perodua’s earnings by 1.2%. Hino (42% associate) is also a key beneficiary of the weaker JPY – its models entail very low localisation rate, where all imports are denominated in JPY.

- On its dealerships: (1) MBM expects to maintain 2-digit growth for its VW dealerships, riding on strong overall VW growth (MBM: 23% share of sales) and contribution from new 3S centres in Johor Bahru and Sungai Petani; (2) New Mitsubishi outlet in Shah Alam from next week. Mitsubishi’s localisation plan (likely in 2H13) is a big boost in allowing more competitive pricing. We gather that initial assembly volumes could hit 5K in FY13 followed by 15K-20K in FY14.

- OMI’s alloy wheel plant is expected to be commissioned in 2Q13. While Perodua is likely to be a key customer, volume ramp-up is not expected to happen immediately as the plant has to undergo initial auditing and volume tests. Management guides for RM6-8mil initial losses this year. The lowest variant of the new Vios (2H13 launch) will use steel wheels and this should benefit OMI – Vios generates monthly volumes 2K-2.5K.

- MBM has completed the sale of a 20% stake in DMSB to existing partner, Mitsui, which lowers its stake in DMSB to 51.5% from 71.5% previously. Proceeds from the sale (RM83mil) are likely to be kept for future capex. More importantly, the deal values MBM’s stake in DMSB at 20x FY12F earnings, which is a significant value creation vs. MBM’s own valuation of 9x FY13F (10x FY12F earnings) at current share price.

Source: AmeSecurities

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