Investment Highlights

• MBM Resources (MBM) saw a 5% growth in its core net profit to RM109mil in FY17. This was above our projection of RM92mil and consensus estimate of RM78mil.

• The core net profit notably excludes RM243mil in impairments made in the 4Q to its auto parts segment: a RM177mil impairment on goodwill & JV investment in Hirotako Holdings, and a RM62mil impairment on the alloy wheels factory under OMI.

• Core PBT for FY17 dropped 9% YoY on a lower gross margin (down 1 ppt) and contribution from its associate Perodua fell 15%YoY. Perodua sales fell 2% YoY in 2017 but its bottomline dropped by an estimated 16% as margins gave way.

• By segments: In motor trading, the group's small decline in its own Perodua volume (-1% YoY) was met with substantially worse declines for Daihatsu & Hino trucks (- 11% YoY) and Volvo, VW & Mitsubishi (-15% YoY). PBT fell (-21% YoY) on a 4Q loss which is not unusual for the quarter.

• In auto parts manufacturing, MBM highlighted that it has cut core losses in its alloy wheels unit by half in 4Q from cost reduction measures. However, the unit continues to be in the red due to below-optimal utilisation and the restriction in passing through certain costs to its customers.

• In 4Q a tepid revenue growth (of 1% YoY) was coupled with the pre-tax loss in its motor trading, continuing losses from the alloy wheels unit and lower associate earnings. As a result, core PBT fell 6% YoY to RM43mil.

• The group's final dividend of 1.5 sen/share in 4Q brings its payout to 3 sen/share for FY17, half of the previous year's.

• We raise our earnings projections for FY18 by 4%, subsequently improving our FV to RM2.30/share (from RM2.20) on an unchanged FY18 PE of 9.5x. We remain conservative on the prospect of recovery for MBM.

• We note the following factors: (1) FY17 earnings were flattish at best for the first three quarters, and a seasonally higher 4Q should not be regarded as the sign of a new status quo; (2) Volume for its motor trading segment has fallen across the board for two consecutive years; (3) The challenge for the alloy wheels unit continues to be to retain existing customers and secure new ones to confidently see a profit in the long-term.

Source: AmInvest Research - 23 Feb 2018