Highlights / Comments

• Earnings deteriorated in 1H16 mainly due to weak consumer sentiments, stiff competitions within the industry and RM depreciation, as well as consumer holding back purchases in anticipation of new model launches in 2H16.

• Aftersales services has been encouraging with overall volume growth of 1.8% yoy in 1H16 and sales/unit reaching RM839 in 1H16 from RM688 in 1H15.

• Management guided positive outlook into 2H16. Earnings growth will be mainly supported by Perodua newly launch Bezza (mid-July), which has been receiving unexpectedly strong orders of 1,000 per day. Cannibalization effect on existing Perodua models has been relatively immaterial.

• MBM will benefit from strong Perodua sales (due to Bezza) directly through:

1) 100% owned DMMB Perodua dealerships – controls 11% market share of total Perodua sales in Malaysia;

2) 78% owned OMI – increased demand for tyre assembly, steel wheels and alloy wheels. OMI alloy is expected to triple its sales in 2H16 (vs. 1H16) from new Bezza sales. OMI alloy is expected to cash break-even in 4Q16 given the demand hike from Bezza;

3) 51% owned AHSB – increased demand for safety features from higher Perodua sales; and

4) 22.6% owned Perodua – earnings growth from higher overall sales volume, driven by high demand of Bezza.

• OMI and Hirotako will also benefit from new launch of Proton models in 2H16. Other segments FA, DMSB and Hino are expected to be relatively flat in 2H16.

Risks

• Prolonged tightening of banks’ HP rules.

• Slowdown in the Malaysian economy affecting car sales.

• Global automotive supply chain disruption.

Forecasts

• We update our model with FY15 annual report and latest management guidance. Earnings forecasts for FY16 and FY17 are relatively unchanged while FY18 earnings forecast is raised by 5.6%.

Rating

• BUY

• Positives – 1) Relatively low valuations; 2) Strong sales of Perodua; and 3) Turnaround of OMI Alloy wheel plant.

• Negatives – 1) Absence of strong foreign automotive partner as compared to UMW (with Toyota) and TCM (with Nissan); 2) Small cap and low liquidity; and 3) Weakened RM.

Valuation

• We remain positive on MBM earnings outlook, leveraging on Perodua. We increase our target price to RM3.08 (from RM2.75) based on SOP. We believe MBMR earnings to have bottomed in 1H16 (gestation period for its investments since 2012 into new alloy wheel plant, Hino manufacturing plant and Perodua - assembly plant, engine plant and transmission plant) and to pick up from 2H16 onwards (enjoying the fruits of investments).

Source: Hong Leong Investment Bank Research - 29 Aug 2016