- MBM released its 2Q13 results last night. The group reported net profit of RM37mil for its 2Q13, which brought 1H13 earnings to RM70mil. This is within expectations accounting for 46% and 45% of our and consensus estimates respectively. Net profit rose by an impressive 13% QoQ and 26% YoY. Operating margins improved to 3.1% from 2.4% in 1Q13, which was hit by the initial impact of prices reduction (for its auto parts division) and aggressive discounting (for its motor trading division).

- Despite a 1.2% QoQ TIV decline, vehicle sales under MBM grew by 4% QoQ thanks to strong sales at Perodua (both at distributorship company where MBM owns a direct 20% stake (sales vol: +6.2% QoQ), as well as Perodua dealership sales via DMMS (sales vol: +5.9% QoQ). Besides volume strength from the launch of the S-series in March, Perodua also gained from a further weakening of the JPY in 2Q13.

- Auto parts division benefitted from a 1% QoQ (+5% YoY) rise in TIP. Increased production from major clients i.e. Perodua (and in 3Q13, Proton) is now offsetting the margin pressure from price reduction since 4Q12. There seems to be a 3-4 months lag impact between actual parts price reduction before it is passed down to end-consumers, which is when incremental production starts to kick in. 2Q13 parts manufacturing earnings rose by 10% QoQ (+7% YoY) following a 12% QoQ decline in 1Q13, which saw the initial impact of parts price reduction.

- However, earnings pressure is still likely to be seen for the wheel manufacturing division given initial losses from the new alloy wheel plant (RM6-8mil loss for FY13F). The new plant is expected to commence supplies to Perodua from Sept at a rate of 10,000 wheels/month. The steel wheel division should see some improvement in 3Q13 from supplies to the new Vios.

- MBM’s 2H13 should further improve on account of: (1) Further JPY weakening in 2Q13 which will be reflected in 3Q13; (2) Strong 3Q13 TIV, which was kicked off by a record high July TIV of 68K units (+28% MoM, +15% YoY) – this will benefit both the auto trading division, associates (Perodua) and parts manufacturing.

- However, reversal of the JPY weakness will see MBM giving back some of the gains it made over the past the past two quarters (and next quarter) towards the end of the year. Maintain BUY at unchanged fair value of RM4.60/share. MBM is a more attractive proxy to Perodua (than UMW) given cheaper access at implied valuation of 9.3x FY13F earnings and a more leveraged exposure (accounts for 65% of earnings vs. 15% at UMW).

Source: AmeSecurities