- We maintain our BUY call on MBM for now with an unchanged fair value of RM3.80/share after the release of its 1Q15 results.

- MBM reported an estimated core net profit of RM27mil (exone- off property earnings) in 1Q15, which was weaker than expected at 17%-18% of consensus and our FY15F numbers. Group earnings were up 14% YoY but fell 21% QoQ.

- Key takeaways from the results:

- (1) Associate earnings were down 21% QoQ (+9% YoY) despite a considerably sharp 13% QoQ rise in Perodua’s invoiced volumes, given a steep 66% QoQ fall (-64% YoY) in Hino’s invoiced volumes, which came as a huge negative surprise (vs. MAA’s registration statistics indicating a 7% YoY for Hino TIV);

- (2) Auto parts division pretax losses narrowed 9% YoY to RM2.3mil given the higher production volume at OMI alloy wheel;

- (3) Motor trading division earnings (comprising dealership sales and after sales and accounts for 14% of group pretax) fell 11% QoQ given the lower after sales throughput (-2% QoQ); and

- (4) Hirotako earnings fell 12% QoQ (-21% YoY) (despite a 14% QoQ rise in TIP), given the price pressure from major customers, although this unit only contributes circa 14% to the group’s core pretax.

- We were surprised by the weak associate contribution to core earnings though this looks to have come largely from Hino rather than Perodua, which would have performed very well judging by improving sales volume and cheaper JPY:MYR levels.

- Our earnings are under review pending clarification from the management on the development at Hino in the 1Q15 results and the extent of price pressure faced by Hirotako. While we understand that MAA’s registration statistics lags that of invoiced sales recognised in MBM’s quarterly statements, the steep fall was simply mind-blowing, in our opinion.

- Having said that, the results does not entirely derail our thesis of a recovery in earnings for MBM (as 1Q15 earnings were still up 14% YoY), but rather, impacts expectations on the degree of improvement. Perodua’s estimated ~4 months waiting list should help sustain near-term volumes, while the persistently weak JPY bodes well for margins. Furthermore, capex has normalised on the back of improving YoY earnings, which suggests potentially better dividend payout going forward.

Source: AmeSecurities Research - 28 May 2015