MBM Resources - Strong start for the year Buy

- MBM’s 1Q12 earnings were in line with expectations. The group reported a net profit of RM41mil for its 1Q12, which made up 26% of our FY12F estimate and 27% of consensus.

- Earnings rose 7% YoY despite Perodua’s poor showing in 1Q12 (unit sales down 11% YoY), given the maiden consolidation of Hirotako’s earnings – the acquisition completed in 4Q12. Revenue was up by 37% while operating profit rose 98%. 

- Margins at the operating level expanded to 5% from 3% in 1Q11 driven by strong margins coming from Hirotako (20% operating margin vs. typical auto part player margins of 10%-15%).  However, at the pre-tax level, margin was slightly eroded by much higher finance cost – MBM drew down close to RM400mil in debt to finance the acquisition of Hirotako last quarter. Net finance cost ballooned to RM5mil from RM0.5mil net finance income in 1Q11.

- Besides the boost from Hirotako, Federal Auto’s vehicle sales improved 55% against 2011 mainly attributable to growth in Volvo and VW sales. Volvo launched a full model change for its S60 model (a D-segment 2.0-2.4 litre engine sedan model) in 1Q12 after more than 10 years. Industry-wide Volvo sales grew 9% YoY. 

- Additionally, the VW marque staged a strong showing in 1Q12, with an industry-wide TIV growth of some 76% YoY, given aggressive campaigning ahead of the launch of VW’s locally-assembled models and given the introduction of several new models throughout 2011. 

- Perodua dealership sales (via DMSB) dipped 4% YoY, which was a lot better compared to industry-wide Perodua sales dip of 11% over the same period. Associate earnings were also resilient (+5% YoY) as the weakness in Perodua sales were offset by strong growth of Hino (commercial vehicle) sales (+37% YoY). To note, the 15% YoY contraction in total TIV in 1Q12 was largely driven by the passenger car segment (-13% YoY) whereas commercial vehicles sales were largely flattish.

- We re-affirm our BUY call on MBM with an SOP-derived ex-all FV of RM3.60/share. Key catalysts in the near-term: (1) Newsflows on MBM’s assembly venture within the next 6 months; (2) Stronger-than-expected performance from Hirotako given increased revenue/car set for supplies to Proton Preve (launched in April 2012).   

Source: AmeSecurities