-  We downgrade MBM to HOLD (from BUY) and lower our fair value to RM3.00/share (from RM4.30/share) following a recent company visit. We trim our projections by 23%/16% for FY14F/FY15F to factor in higher losses at 78%-owned OMI and lower margins for MBM’s auto distribution division. We now expect MBM’s FY14F earnings to contract by 15% YoY, before staging a recovery in FY15F.

-  OMI’s alloy wheel supply to Perodua has been delayed due to additional requirements in its manufacturing process. OMI is likely to miss the initial supply phase for the Perodua Axia, which means that the volume ramp-up that we had initially expected will be delayed into FY15F, at best. An incremental RM500K had to be invested, raising capex for OMI’s alloy wheel plant marginally to RM103mil.

-  Losses from OMI’s alloy wheel plant are expected to double this year to RM20mil from a RM10mil pre-tax loss in FY13 given that incremental fixed cost had kicked in while volumes remain well below breakeven due to delays in supply ramp up as mentioned above. The plant is now undergoing audits for several other non-national clients, which further increases fixed cost in the near term.

-  On auto distribution, we see developing risk for either margin or volume expectations in the A-segment given the tightening monetary policy and a potential inflationary impact once GST kicks in, in early FY15. A-segment buyers are typically the most sensitive to changes in disposable income and credit access/cost. Perodua had already slashed its 2014 sales target to 193K from an earlier 197K. Stricter lending guidelines in Jan 2012 saw Viva sales drop by 19% YoY in 1Q12, if this is of any indication (Chart 2).

-  Management clarified that discounting (RM3,000-RM5,000/car) for the Viva will be compensated by weaker JPY. However, consensus expectations will be negatively impacted as the weaker JPY would have been largely factored into projections prior to the discounts, which is effectively a 9%-15% reduction against the model’s original price. Meanwhile, Perodua’s new plant will incur initial losses of circa RM2mil (MBM’s share), which will marginally drag core contribution from Perodua.

-  MBM is trading at 9.5x FY14F earnings, more or less at par to historical average. While we do not see much downside to share price, the stock lacks meaningful catalysts in the near term. Until earnings from its core businesses come through meaningfully, we think valuations are unlikely to re-rate.

-  Positively, capex cycle has peaked and net gearing now stands at just 9%. MBM is open to M&As that can build on its existing line of businesses, but there is nothing firm on the table so far.

Source: AmeSecurities