- We raise MBM to BUY from HOLD and raise our fair value to RM3.40/share (from RM3.30/share previously) on the back of an improving earnings outlook and battered valuations. Our FY15F/16F earnings are raised 9%/14% to factor in higher TIV expectations for Perodua. Our revised projections are 5%/10% higher than consensus over FY15F/16F.

- MBM’ share price has fallen 13% over the past 12 months on the back of: (1) stalling Perodua TIV; (2) weak earnings from discounting and absence of A-segment model between Jul–end Aug 2014; (3) start-up cost of Perodua’s new plant; and (4) doubling in losses from OMI’s alloy wheel unit. Valuations which have retreated to below mean (7.9x FY15F PE) sufficiently reflect the EPS deceleration in FY14.

- Earnings prospect is improving dramatically given the strong momentum from the Axia (Perodua accounts for 80% of MBM’s bottomline). The Axia has garnered >70K bookings since its launch (average 15K bookings/month or 95% of Perodua’s 2014 monthly TIV) with 29K units delivered up to Dec 2014. At the current production rate, waiting list is estimated at 4-5 months and should sustain Perodua’s TIV throughout the challenging 1H15. We estimate Axia to account for >40% of Perodua TIV in 2015.

- A strategic shift in Perodua’s A-segment price points seems to have tackled the high loan rejection rate issue faced previously; more than half of Axia’s higher variants (that did not exist in the Viva generation) are priced closer to the Bsegment (See Exhibit 2), i.e. the largest segment in the industry which targets more affluent buyers with little credit issues. The majority of Axia buyers are “additional car” buyers, instead of the typical entry level buyers previously.

- The potential implementation of Malaysia’s “cash for clunkers” program could be a strong catalyst for Perodua, depending on the rebate offered. At the mooted RM5K, models in the national car price segment will likely benefit the most. Proton’s “X-Change” program artificially boosted its TIV by 18% during trial implementation in 2009. It is estimated that 53% of the 12.4mil Malaysian vehicle population are >10 years of age and 37% are >15 years.

- Perodua’s forecast 2015 TIV of 208,000 units surprised on the upside vs. our earlier forecast of 197K units. The record volume comes amid a freeze in sales network expansion to raise efficiency- average volume per outlet is estimated to rise by 6% in FY15F. MBM benefits directly via Perodua and indirectly being the largest Perodua dealer via DMMS.

- MBM is a net beneficiary of a weak JPY via Perodua and Hino, but the impact is muted as Perodua is highly localised. Every 1% change in JPY impacts group earnings by 0.6%. Dividend yields of 4.4%-5.2% cushions downside risk for the stock.

Source: AmeSecurities