Highlights/ Comments

• FAHB recognized RM13.8m provisions for receivables and inventories in view of the deteriorating market sentiment. Excluding these items, FAHB would have recorded RM2-3m profits before tax in FY15, higher than RM1.3m in FY14, due to increasing after sales service throughputs. Nevertheless, management guided for conservative outlook for the business units.

• Contribution from associates (Perodua and Hino) has declined by 20.0% yoy due to higher cost structures, lower product mix (more sales contribution from Axia) and lower Hino sales. Expect earnings for FY16 to remain somewhat stable based on Perodua sales target of 216k units (+1.2% yoy), as stronger sales volume is likely to be offset by weak RM.

• Hirotako (JV) was affected by lower Proton production volumes (which contributed circa 40% of revenue) as well as higher input costs (imports in US$). Contribution from JV (Autoliv) dropped by 32.8% yoy. Outlook for FY16 remains uncertain from the impact of weak RM, being offset by potentially higher demand from the national OEMs.

• Continued losses from OMI Alloy wheels due to low production volume. Expect continued losses in 1H16 before breakeven by 2H16, as the unit ramps up production to 40- 50k units/month to fulfill order from Perodua.

• New launches for the group in 2016 includes 2 new models from Perodua, Passat (VW), Tiguan (VW), Outlander (Mitsubishi) and S90 (Volvo).

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 FY16-17 by 18.5% and 15.8% respectively, after accounting for lower contribution from autoparts manufacturing (weaker volume and margin) and lower contribution from Perodua.

Rating

BUY

Positives

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

Negatives

• Absence of strong foreign automotive partner as compared to UMW (with Toyota) and TCM (with Nissan).
• Small cap and low liquidity.
• Weakened RM.

Valuation

• We remain positive on MBMR growth into FY16, leveraging on the sustainable Perodua sales and turnaround of OMI Alloy Wheel. Maintain BUY with lower TP of RM2.75 (from RM3.00) based on SOP.

Source: Hong Leong Investment Bank Research - 26 Feb 2016