Results

• Below : 2Q17 results was below our and street expectations as core PATAMI for the quarter was RM16.4m, bringing cumulative 1H17 earnings to RM35.3m, representing 42.0% of our 2017 estimate and 36.0% of consensus.

Deviations

• Lower-than-expected contribution from JV and associates for automotive components and parts manufacturing, being dragged by lower Proton production volume.

Dividends

• Declared first interim dividend of 1.5 sen/share.

Highlights

• YoY : Core PATAMI dropped by 13.0% mainly due to lower JV/Associates contribution by 13.8%. Despite higher sales volume YoY for associates - Perodua and Hino, overall contributions dropped by 17.0% due to deteriorated revenue mix and higher operational costs. Contribution from JV Hirotako also dropped by 49.6%, dragged by lower Proton production volume.

• QoQ : Similarly, core PATAMI dropped by 13.8% on lower JV/Associates contribution by 14.0% due to lower sales volume QoQ for Perodua, Hino and Hirotako.

• YTD : Despite the lower YoY operational losses from subsidiaries (due to improved revenue mix from Volvo and cost cutting measurements), core PATAMI still dropped by 8.5%, dragged by lower JV/Associates contribution by 8.8%.

• Outlook : Earnings to leverage on Perodua’s sales, which is expected to rebound in 4Q17 with the introduction of new MyVi model while the impact from RM depreciation (against US$) is expected to gradually normalize in 2H17.

• However, the automotive parts & components (especially Hirotako and OMI Steel) are expected to remain dragged by Proton’s ongoing restructuring exercises in the near term.

• On positive note, OMI has registered positive EBITDA level of RM0.2m in 2Q17 (after reported losses since 4Q15), indicating cash breakeven level and expected earnings growth on higher volume production.

Risks

• Prolonged tightening of banks’ HP rules.

• Slowdown in the Malaysian economy affecting car sales.

• RM depreciation.

• Successful turnaround of OMI.

Forecasts

• Cut earnings for FY17 by 11.6%, FY18 by 9.1% and FY19 by 4.1% to account for lower contribution from JV/Associates.

Rating

BUY ↔

• MBM is expected to leverage on sustainable sales of Perodua in Malaysia (as well as opportunity for export market). Perodua has invested into major manufacturing facilities for engine (with Daihatsu) and transmission (with Akashi Kikai and Daihatsu) to improve its cost structures and support its long term growth. Furthermore, OMI has started to show positive signs of turnaround in 2Q17.

Valuation

• Maintain BUY on MBM with lower TP of RM2.54 (from RM2.68) based on SOP, post adjustment to 2018 earnings..

Source: Hong Leong Investment Bank Research - 24 Aug 2017