Results

Below – Reported 3Q13 core earnings of RM35.1m and 9M13 of RM105.5, achieving only 67.7% of HLIB’s forecast and 70.3% of consensus. We expect continued competitive market especially the premium car market segment. Deviations

Lower than expected sales volume and margins from Federal Auto.

Dividends

None.

Highlights

3Q13 revenue dropped to RM556.3m (-4.2% qoq; -4.9% yoy) mainly due to lower sales volume of Volvo & Volkswagen (under Federal Auto) and Hino & Daihatsu (DMSB), as well as lower OMI sales.

3Q13 EBITDA margins dropped at faster pace on lower car sales volumes, higher operational cost, higher marketing and distribution cost, as well as high start-up cost for the new alloy wheel plant (OMI).

Associate contribution declined slightly by 1.7% qoq mainly on lower sales of Perodua cars (-1.6% qoq). Perodua is expected to continue its sales momentum into 2014 when it launches new Viva replacement by 2H14. Furthermore, the upcoming new Perodua plant by mid-2014 is expected to double its production capacity and target for export market.

The aggressive plans of both the national cars for export market are likely to benefit MBM’s automotive parts manufacturing segment (Hirotako and OMI) in the longer term. Increasing foreign OEM setting manufacturing hub in Malaysia and increasing localization rate will also benefit MBM.

Risks

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

Forecasts

We have cut our FY13-14 earnings by 8.9% and 3.0% respectively, and marginally cut FY15 earnings by 0.1%, on lower car sales assumption.

Rating

BUY

Positives –

• Relatively cheap valuations.
• Expansion into vehicle assembly to complete its strategy of becoming an integrated automotive player.
• Strong sales of Perodua.
• Increasing domestic car production and localization.
• Weakened Yen against RM.

Negatives –

• Does not have strong foreign automotive partners as compared to UMW (with Toyota) and TCM (with Nissan).
• Margin squeeze on components and parts segment.

Valuation

Maintained BUY on MBM with lower TP of RM4.45 (from RM4.70) based on SOP.

Source: Hong Leong Investment Bank Research - 21 Nov 2013