Results

Within Expectations – Reported 2Q14 core earnings of RM31.6m and 1H14 of RM55m, in-line with HLIB’s forecast (49.4%), but slightly below consensus (43.6%). We expect stronger earnings in 2H14, given expectations of stronger demand for automotive parts and components as well as improved Perodua sales from newly introduced Axia.

Deviations

None.

Dividends

Declared single tier interim 4 sen dividend.

Highlights

2Q14 results started to show signs of recovery with the improvement in revenue, margins and associate contribution as compared to 1Q14.

Revenue in 2Q14 improved +11.3% qoq on stronger sales of Automotive segment – DMSB (Dealership for Perodua, Hino and Daihatsu) and Component Segment – Hirotako (Safety and Acoustic) and OMI (Wheels), which was partially offset by lower sales of FAHB (Dealership for Volvo, VW and Mitsubishi).

EBIT margins increased qoq from Automotive (EBIT margin +0.2 ppts qoq) on higher vehicle sales (DMSB) and improved sales after service volume, while Components (EBIT margin +2.8 ppts qoq) also benefited from higher sales volume (enjoy economy of scale).

Contribution from associate Perodua and Hino improved 18.5% qoq from higher sales volume of Hino (+17.2% qoq), full commencement of Hino new manufacturing plant (since March) and improved margins of Perodua.

Entering 2H14, consumer sentiments will be affected by tightening banks credit (including OPR hikes). However, we believe Perodua’s new model AXIA will be highly demanded and boost sales in 2H14. It has received 3,500 pre-launch bookings and is targeting 30k sales in 2014 (annualized at 70-80k units).

Risks

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

Forecasts

Unchanged.

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).
• Small cap and low liquidity.

Valuation

Maintained BUY on MBM with unchanged TP of RM4.00 based on SOP.

Source: Hong Leong Investment Bank Research - 20 Aug 2014