Investment Highlights

• We maintain HOLD with an unchanged FV of RM2.20/share on MBM Resources (MBM) based on an FY18F PE of 9.5x.

• 9MFY17 core net profit of RM55mil (-6% YoY) came in within expectations at 70% of our and consensus projections.

• In 3Q, revenue improved 8% YoY on a higher topline for motor trading (better car sales except for Federal Auto) and auto parts manufacturing. Its bottomline was still subdued (core net profit down 8% YoY) due to the continuing losses of the latter.

• For the YTD period, revenue improved 5% YoY while core net profit fell 6% YoY.

1) Motor trading sales saw an upswing in 3Q but YTD numbers were still poor contributed by weaker sales in the first two quarters of FY17. This was especially true for the group's sales of Daihatsu and Hino trucks (down 24% YoY) and Federal Auto (down 22% YoY; Volvo sales held up with support from the XC90 while Volkswagen and Mitsubishi sales fell drastically).

2) The auto parts manufacturing segment is still struggling to obtain efficiency for the alloy wheel operation. The segment's revenue was sequentially flat in 3Q but operating losses more than doubled to -RM7mil from -RM3mil in 2Q. Core losses before tax for the segment increased 30% QoQ to -RM6mil).

3) Associate earnings fell 11% YoY for 9MFY17 despite recording better Hino and Perodua sales. This should improve in 4Q as we expect sales to spike due to the seasonality factor and recent introduction of the new Myvi.

• We believe the coming quarters will benefit from the new Perodua Myvi by way of higher associate earnings (from MBM's 20% stake in Perodua) and a higher topline for the auto parts manufacturing segment.

• The real test for MBM's alloy wheels operations will be to finally turn a profit; this requires both a substantial volume jump and better operational efficiency. In the past, a volume spike was accompanied by a jump in losses: 4Q16 accounted for 30% of the auto parts manufacturing segment's revenue that year, but 46% of its operating losses.

• Apart from sustaining the production volume that comes with the new Myvi, the challenge will be to attract new customers for the alloy wheels unit to see breakeven levels.

Source: AmInvest Research - 23 Nov 2017