-  We maintain our BUY call on MBM with unchanged fair value of RM4.60/share following a recent meeting with management. Below are key takeaways from the meeting:

-  The vendor cost down initiative by Perodua impacted Hirotako and OMI negatively, but we understand this is expected to be offset by higher order volumes eventually. However, Proton’s 25% YoY production decline was a key drag on 1Q13 earnings. On the bright side, a basic Preve model is in the works, we understand, and could help address Proton’s declining production volume later in the year.

-  OMI’s alloy wheel plant will commence maiden supplies to Perodua from Sept 13 onwards at a rate of 10K wheels/month. Once OMI passes this 6-month “probationary” period, volume will likely be ramped up to substitute Perodua’s alloy wheel imports, which currently account for 60% of its requirement, or circa 450K wheels/annum (37.8K/month) on our estimates. However FY13F will see initial losses of up to RM9mil, before breaking even in FY14F (1Q13 loss: RM0.8mil). OMI’s steel wheel operations might also see some recovery in 2H13 when Toyota launches the new Vios, whereby OMI will supply steel wheels for Vios’ lower variants.

-  After a 12% cost reduction achieved by Perodua in 1Q13 from its cost efficiency drive, there is a further 17% targeted by FY14. Notably, the cost down initiative has more than offset the aggressive discounting faced by Perodua. In the upcoming quarters, Perodua should also see more significant benefits from a weaker JPY. The JPY weakened further by 11% in 1Q13 after a 5% QoQ weakening in 4Q12 (3-mth lag impact on financials). As Perodua accounts for 60% of MBM’s pretax earnings (vs. 30% from auto parts), the group is a net beneficiary of Perodua’s cost down initiative. Launch of the Sseries in mid-March should support sales volumes – Perodua has bookings of 20K units currently (>1mth waiting list).

-  Perodua will double its capacity when its new plant (100K capacity on 1-shift) is commissioned in mid 2014. Additional capacity will cater for the Viva replacement and potentially new models to be introduced, which we think might be positioned for Perodua to qualify for EEV initiatives. Exports are expected to rise (to 20K by FY15) and with very deep localisation already achieved here (including a transmission plant by Nov 13), Perodua looks well positioned to become one of Daihatsu’s key export hubs in ASEAN.

-  MBM (while admittedly less liquid vs. UMW) gives a much cheaper access to Perodua’s earnings (FY13F PE of 10x vs. UMW’s 16x). Key catalysts:- (1) NAP announcement on Malaysia’s EEV initiatives and incentives; (2) Franchise wins, which gives MBM better distributorship margins vs. 1%-2% dealership margins currently; (3) Introduction of new models by Proton; (4) Introduction of new Vios in 2H13; (5) Further cost down initiative at Perodua; (6) Further weakening of the JPY.

Source: AmeSecurities