Results

Within  Expectations  –  Reported  3Q14  core  earnings  of RM25.3m  and  9M14  of  RM80.3m,  in-line  with  HLIB’s forecast   (73.3%)  and  consensus  (68.3%). We expect  strong earnings  in  4Q14,  mainly  due  to  maiden  deliveries  of  highly demanded  Perodua  Axia (launched  in mid Sep 2014).

Highlights 

Revenue  in  3Q14  dropped  14.4%  qoq  on  lower  sales  of Automotive  segment  –  DMSB  (Dealership  for  Hino  and Daihatsu)  and  DMMS  (Dealership  for  Perodua);   and Component  Segment  –  Hirotako  (Safety  and  Acoustic)  and OMI  (Wheels),  as  TIP  (especially  Proton  and  Perodua) dropped  18.4% qoq.

EBIT  margins  dropped  qoq  mainly  due  to  lower  production volume  for  automotive  components  manufacturing  – Hirotako  and  OMI,  as  well  as startup losses from OMI Alloy wheel.  Management  expects  higher  sales  for  OMI  Alloy wheel  in  4Q14,  as  the  plant  started  supplies  to  a major car model.

Contribution  from  associate  Perodua  and  Hino  dropped 6.9%  qoq  due  to  lower  sales  volume  and  start -up  of  new Perodua  and  Hino  manufacturing  plants.  Furthermore, Hirotako  associates  also  reported  losses  of  RM0.5m  in 3Q14 vs. RM0.5m profits in 2Q14.

Entering  4Q14,  we  expect  stronger  contributions  from Perodua  (as  well  as  DMMS)  from  the  newly  launched  Axia model,  which  has  received  overwhelming  bookings  (42k orders)  as  well  as  lower  losses  from  OMI  alloy  wheel manufacturing  (as  the  plant  gradually  ramp productions from new  orders),  while  Hirotako  is  leveraged  to  the  higher production  volume  of Perodua  and Proton new models.

Risks

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

Rating

BUY

Positives  –

• Cheap  valuations.
• Expansion into vehicle assembly to complete its strategy of becoming an integrated  automotive  player.
• Strong sales of Perodua.
• 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 - 19 Nov 2014