Highlights/ Comments

• Despite lower sales volume of Federal Auto, dealership PBT improved by RM2.14m in 1H15 on lower operational costs (including discounts) and higher after sales services. Expect earnings to improve in 2H15 and FY16 on improved sales of Federal Auto as well as higher after sales revenue.

• Contribution from associates (Perodua and Hino) improved by RM6.14m yoy to RM65.19m mainly due to breakeven of Hino Manufacturing in 1H15 vs. losses of RM11m in 1H14 (start-up losses). Profits from Hino Sales declined by circa RM4m yoy. Expect earnings to sustain into 2H15 and stronger in FY16 (leverage on Perodua new models introduction in FY16).

• Hirotako (JV) was affected by lower Proton production volumes (which contributed circa 40% of revenue) as well as higher input costs (imports in US$) in 1H15. Contribution from JV (Autoliv) dropped by RM4.35m yoy to RM9.25m in 1H15. Expect higher volumes in 2H15, as Proton ramp up production (post inventory clearing exercise in 1H15).

• Continued losses from OMI Alloy wheels due to low production volume. The losses increased by RM1.2m yoy to RM7.5m in 1H15. Expect continued losses in 2H15 before breakeven in FY16, with ramp up production to 500-600k units (from circa 200k units in FY15).

• On currency impact, management explained the gross impact of every 1 sen movement in each foreign currency to MBM’s PBT: - 1. USD : RM200,000 (exposure through Autoliv and OMI); 2. THB : RM20,000 (exposure through Autoliv); and 3. Euro : RM5,000 (exposure through Autoliv).

Risks

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

Forecasts

• We have cut our earnings for FY15-17 by 16.6%, 12.3% and 12.2%, respectively, after accounting for lower contribution from autoparts manufacturing (weaker volume and margin).

Rating

BUY

Positives

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

Negatives

• Does not have strong foreign automotive partners as compared to UMW (with Toyota) and TCM (with Nissan).
• Small cap and low liquidity.
• Weakened RM.

Valuation

• Despite the disappointed 1H15 earnings, we remained positive on MBMR growth into FY16, leveraging on the sustainable Perodua sales and turnaround of OMI Alloy Wheel. Maintained BUY with lower TP: RM3.45 (from RM4.28) based on SOP.

Source: Hong Leong Investment Bank Research - 21 Aug 2015