Highlights

MBM is undergoing transitional period (gestation period for higher capacity), where investments (for expansion) have been put in place since 2011 for future growth. These investments are expected to start bearing fruits in 2015.

Automotive:

• Full commencement of Perodua new manufacturing facility with new EEV model AXIA contribution in 2015 (to be launched in Sep 2014).
• Full commencement of Hino new manufacturing facility in 2015. The plant incurred losses of ~RM11m (MBM’s portion) in 1H14 and expected to turnaround in 2H14.
• Higher contribution from aftersales service (higher average sales/car and higher volumes). MBM has invested RM75m to improve networks and service bays (capacity) by ~84% (2013 vs. 2010). The current capacity utilization is ~ 50%.

Components:

• Hirotako to benefits from higher demand for safety products given higher Total Industry Production volume (new and existing OEMs increase CKD productions for local and export markets) and greater safety emphasis for new models (ASEAN NCAP).
• OMI new alloy wheel plant is expected to breakeven or minor losses in 2015 (vs. RM10m loss in 1H14 and expected RM20m loss for 2014), as new orders secured from OEMs (i.e. Perodua, VW, Honda etc) and REs.
• Management also highlighted stronger balance sheet and cashflow going forward which entails higher dividends, as most expansion capex has been invested in 2012-2013.

MBM will recognize one-off gains from Menara MBM completion in 4Q14. The GDV was RM240m, with 40% sales to third-parties and 30% within the group.

Risks

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

Forecasts

Fine-tuned our model, with minor adjustment to our earnings for FY14 (-2.0%), FY15 (+3.1%) and FY16 (+2.6%). We have not factored in the gain from property sales (noncore).

Rating

BUY

Positives –

• Cheap valuations.
• Capacity expansion of Perodua, Hino, OMI and sales & services centers.
• Leverage to increasing OEMs’s production in Malaysia for domestic and export markets.

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 recommendation with unchanged Target Price of RM4.00 based on SOP

Source: Hong Leong Investment Bank Research- 21 Aug 2014