Investment Highlights

• We retain our HOLD rating on MBM Resources (MBM) with a lower FV of RM2.20/share based on an unchanged FY18 PE of 9.5x. We cut our FY17-FY18 projections by 1-5% to account for lower sales and income contribution from JV.

• The second quarter saw weaker revenue (-5%YoY) and net profit (-14%YoY). Revenue was lower for both the group's segments, motor trading and auto parts manufacturing which declined 5%YoY and 7%YoY respectively. This reflected the 17%YoY drop in group car sales and 12%YoY drop in total industry production (TIP).

• Net profit also took a hit from a lower share of profit from JV and associates, which had previously held up the group's bottomline, and also mediocre returns from its motor trading segment and continuing losses from auto parts. JV earnings (AHSB) halved due to lower demand from OEM customers (Proton and Perodua accounted for 80% of its sales), while associate earnings fell 8%YoY despite better sales numbers for both Hino and Perodua.

• The YTD result was mildly positive, in comparison. Revenue was higher by 3%YoY (both segments saw double-digit topline growth in 1Q, mitigating the weakness in 2Q). Net profit tumbled 4%YoY due to the weaker JV and associate earnings, while margin for motor trading was flat (at 1.2% on PBT level) and losses for auto parts was higher by 8% YoY at RM11mil.

• The YTD results ultimately came in below projections, meeting 42% of our full-year forecast and 36% of consensus. This was due to a decline in JV and associate earnings, while contribution of earnings growth from both the group's main segments were unremarkable.

• The group declared a dividend of 1.5 sen/share, half the 3.0 sen paid in the first half of last year (payout ratio of 16% vs. 32% of net profit).

• We expect stronger earnings in the second half driven by the seasonally higher sales in the final quarter and the anticipated Perodua Myvi. This will minimise the losses in its alloy wheel unit, which was last utilising only 50% of its total capacity (of 60K/month or 720K/year).

• However, we caution on the catch-22 the group is in: a jump in volume could worsen operational issues in its alloy wheel unit, if its broken foundation is not remedied. In the past, the unit saw a high rejection rate of 40% due to inadequate infrastructure and some existing contracts were subsequently pared back due to poor delivery standards.

Source: AmInvest Research - 24 Aug 2017