-  MBM registered 2Q14 net profit of RM31mil, which brought 1H14 earnings to RM55mil. The results came in short of consensus estimates, accounting for only 43% of consensus’ FY14F earnings of RM126mil. It was however, broadly in line with our expectation and accounted for 46% of our full year estimate.

-  The 2Q14 earnings fell 16% YoY to RM31mil, mainly dragged by an 18% drop in associate earnings. Perodua sales volume (captured based on invoicing) dropped by 3.8% YoY and by 3.6% QoQ. Management had recently highlighted the high loan rejection rates of up to 40% for its lower segment model buyers. A RM3,000-RM5,000 per car price discount was introduced in June to help cushion the impact, but this will negatively impact margins from 3Q14 onwards as the price cut is significantly 9%-15% lower against the model’s original selling price.

-  On top of this, 42%-owned Hino saw a 10% drop in sales volume while start-up cost at the new manufacturing facilities also dragged associate earnings. Hino’s manufacturing unit is likely to break-even on a full year basis given the immediate off-take by Hino Motors.

-  At the operating subsidiary level, the group’s dealership unit saw a 6% decline in topline. This was dragged by Federal Auto’s 21% YoY decline in sales volume coming mainly from VW. Although VW Malaysia’s total sales volume was up 34% YoY in 2Q14, MBM faces competition by other VW dealerships.

-  The group’s parts manufacturing unit registered a 10% higher EBIT, in line with an 11% YoY growth in TIP. Hirotako likely drove the bulk of the growth. OMI is seeing increased losses from its alloy wheel plant given the higher cost from increased audit/trial runs for potential customers. As we highlighted yesterday, OMI will likely miss the initial supply for the Axia and this pushes out OMI’s alloy wheel plant breakeven point into FY15F.

-  An interim dividend of 4sen/share (50% payout) was declared, up from 3 sen/share last year despite the drop in earnings. Notably, dividends from associates rose 12% in 1H14, while FCF improved given a significant drop in capex this year.

-  Dividend yield of 4.4% (FY14F) provides a cushion to significant share price downside. That said, earnings revision cycle has turned negative and the 2Q14 underperformance underpins this, as well as our downgrade yesterday. Maintain HOLD on MBM at an unchanged fair value of RM3.00/share.

Source: AmeSecurities