Highlights/ Comments

• In 2014, MBM Group sales have been underperforming market TIV mainly due to new launches and aggressive sales campaigns by competitors (such as Toyota, Honda and Mazda). Nevertheless, MBM is expecting Perodua sales to rebound strongly after promising orderbooks for new Axia (82k units by early Feb 2015), as well as strong line-up from Volvo and improving consumer sentiment for VW.

• Hino has seen stronger earnings in 2H14, which has offset 1H14 losses of RM11m due to high start-up cost related to the new plant. For FY15, management guided for step up in earnings from low base in FY14. Hino is foreseeing stronger profits with the current low JPY.

• MBM on-going focus on after sales service has been bearing fruits, which has seen revenue PBT contribution increased by RM8.34m yoy. The group is opening new service centers for VW in Seri Hartamas, Perodua/Hino in Johor and Volvo in Mid-Valley in 2015.

• OMI new alloy wheel plant reported losses at RM25m in FY14, due to ramp-up phase. The production only started to ramp up to 140k units in Dec due to new MyVi contracts. Management is expecting breakeven in FY15, with increasing contract order from Perodua and foreign OEMs. Continued investment will be made in 2015 to increase the plant capacity to 750k units p.a. from existing 500k units p.a.

• On the other hand, Hirotako continued to face deteriorating margins due to lower production volumes of the national cars (especially Proton). Furthermore, it also face higher input costs pressure for imports denominated in US$.

• With lower capex (RM33m) and stronger cashflow for FY15, management guided for higher dividend payout for the year.

Risks

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

Forecasts

• We have fine-tuned our earnings for FY15-16 by -0.1% and -1.5% respectively. Introduced FY17 earnings at RM179m.

Rating

BUY

Positives

• Cheap valuations.
• Strong sales of Perodua.
• Turnaround of OMI Alloy wheel plant.
• 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

• We remained positive about MBMR growth, leveraging on the sustainable Perodua sales and turnaround of OMI Alloy wheel plant. Maintained BUY on MBM with higher TP of RM4.28 (from RM4.00) based on SOP, as we roll forward our valuation into FY16.

Source: Hong Leong Investment Bank Research - 3 Mar 2015