- We maintain our HOLD call on MBM with an unchanged fair value of RM3.30/share. MBM reported net profit of RM26mil for 3Q14, which brought 9M14 earnings to RM80mil. This only accounted for 68% of our full-year estimates and 66% of consensus. However, 4Q14 should be exceptionally stronger as it will capture the full quarter impact of Perodua Axia and narrower losses at Perodua’s manufacturing plant.

- After a weak 2Q14 result which triggered downgrades by the street, 3Q14 disappointed further with another 18% fall in earnings. This came from weaker revenues from both the parts manufacturing division (-21% QoQ) and auto trading (-13% QoQ). Weaker auto trading revenue came from across the board except for Federal Auto, which saw volumes rise 3% QoQ.

- Associate earnings fell 10% QoQ (-25% YoY) despite the launch of Axia in mid-Sep, due to initial losses from Perodua’s new manufacturing plant. On top of this, Perodua also saw lower invoiced sales (which captures sales numbers ahead of MAA statistics).

- The 3Q13 was a weak quarter due to the long Raya holidays, while the typical pre- Raya purchasing rush did not quite materialise this year. Consumers were also holding back purchases ahead of the launch of the new Axia and Iriz, we suspect.

- On the bright side, the auto trading division saw margin recovery (+30bps to 1% EBIT margin) given gradually increasing after sales revenue and cost management efforts. Management also indicated last quarter that Federal Auto was attempting to rollback some of the discounts it offered.

- Perodua’s manufacturing losses (from its new plant) are expected to narrow by end of the year, while 4Q14 will show the full quarter impact of the Axia. However, 4Q also entails deep discounting and we think this year could be an exceptionally competitive environment as players strive to clear off inventories ahead of uncertainties in FY15F.

- MBM is trading at 8.5x FY15F PE – at a discount to peers and 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, cash flow generating business come through meaningfully, we think valuations are unlikely to re-rate.

Source: AmeSecurities