Results

Below Expectations – Reported core earnings for 1Q14 at RM23.4m, achieving only 15.2% of HLIB’s forecast and 15.3% of consensus.

Deviations

Lower than expected sales volume and margins compression due to intense competitions (aggressive sales and promotional activities).

Dividends

None.

Highlights

Revenue in 1Q14 dropped on weaker group sales volume (Federal Auto, DMSB and DMMS), which was partially offset by higher contribution from component manufacturers Hirotako and OMI.

Moreover, 1Q14 EBITDA margins were impacted by several factors such as: 1) intense competition among dealers of various OEMs in 1Q14 due to 2014 NAP announcement, as consumers withheld purchases in anticipation of lower car prices; 2) autoparts manufacturing – high operational costs including revised electricity tariffs; 3) high startup cost on OMI’s new alloy manufacturing infrastructures.

Associate Perodua and Hino contributed lower earnings at RM26.4m in 1Q14 vs. RM34.8m in 1Q13 on high startup cost for new manufacturing plants (Perodua and Hino) as well as lower sales volume of Hino trucks.

We believe MBM’s 2014 earnings will continue to be impaired by the intense competitions and high startup cost for its manufacturing infrastructures. Any meaningful recovery is only expected by 2015, when the manufacturing facilities improved utilization rates and stronger contribution from new Perodua EEV model.

Risks

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

Forecasts

We cut our FY14-16 earnings by 27.4%, 15.9% and 13.8% respectively to account for the potential intense competitions and higher manufacturing cost.

Rating

BUY

Positives –

• Cheap valuations.
• Expansion into vehicle assembly to complete its strategy of becoming an integrated automotive player.
• Strong sales of Perodua and VW.
• Weakening Yen against RM.

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

Maintained BUY on MBM with lowered TP of RM4.00 (from RM4.52) based on SOP.

Source: Hong Leong Investment Bank Research - 21 May 2014