Highlights

MBM’s related automotive marques have shown healthy sales growth in 1Q13. Subsidiary Federal Auto (100%) sales increased by +10.7% yoy (VW, Volvo and Mitsubishi) and DMSB (51.5%) at +3.3% yoy (Perodua, Hino and Daihatsu).

Associate Perodua (22.5%) sales grew by +4.4% yoy, while Hino (42%) was relatively flat at -0.3% yoy. Perodua sales continued strong growth at +26.2% yoy in April with ytd +9.2% yoy. Perodua and Hino contributed ~70% and ~20% to MBM’s bottomline.

Perodua is undergoing expansion plan for RM790m to double its production capacity to 405k units p.a. The new plant is expected to commence operation by mid 2014. We expect Perodua to maintain its domestic market share of ~30% and increase exports volume (through new markets or collaboration with Daihatsu).

Hino is also investing a new manufacturing plant of 10k p.a. capacity, to cater for domestic market. The plant is expected to commence operation by early 2014, which will enhance its margins (currently contract assembly by ASSM).

Weaker JP¥ in 1Q13 (-13.5% yoy; -11.2% qoq), will improve margins for Perodua and Hino significantly. Perodua has 20% of its cost structure denominated in JP¥, while Hino’s cost structure is 100% denominated in JP¥. Furthermore, JP¥ has further depreciated in Apr-May period to below RM3/ JP¥ (x100), which will further enhance Perodua and Hino contribution to MBM ‘s bottomline.

Risks

• Prolonged tightening of banks’ HP rules.
• Slowdown in the Malaysian economy affecting car sales.
• Global automotive supply chain disruption.
• Continued depreciation of RM.

Forecasts

Increased FY13-15 earnings by 6-8%, after accounting for higher Perodua sales and higher margins due to JP¥ depreciation.

Rating

BUY

• Positives –
  • Cheap valuations.
  • Expansion into vehicle assembly to complete its strategy of becoming an integrated automotive player.
  • Strong sales of Perodua.
• Negatives –
  • Does not have strong foreign automotive partners as compared to UMW (with Toyota) and TCM (with Nissan).
  • Potential high gearing due to continued expansion plan.
  • Small cap and low liquidity.

Valuation

• Reiterated BUY on MBM Resources with higher target price of RM5.00 (from RM4.35) based on SOP, as we have increased FY13-15 earnings and ascribed higher P/E to Perodua earnings.

Source: Hong Leong Investment Bank Research - 23 May 2013