Highlights/ Comments

• We attended MBM’s analyst briefing and came away feeling positive on its near term prospects.

• 1HFY17 results recap: Net profit fell to RM35.3m largely on lower contribution from JV/Associates. YTD, JV/Associates contribution dropped by 8.8% YoY – mainly due to weak Perodua and Hino performance (due to plants shut down for Raya festive and lower margin mix) and decline of JV Autoliv Hirotako, affected by demand from Proton.

• Autoliv Hiratako (51%-owned jointly-controlled entity) contribution dropped 23.1% YoY to RM3.7m in 1H17, mainly dragged by lower airbag production (-12.2% YoY) attributed to low demand from Proton, partially offset by higher seatbelts volume (+6.3% YoY) and steering wheels (+24.7% YoY).

• OMI Steel wheel recorded higher volume (+3.3% YoY) from on-going replacement demand for lower end models. On the other hand, OMI Alloy wheel was gaining good momentum (+89.2% YoY), boosted by domestic REM and export to Germany.

• Regarding OMI Alloy wheel plant, MBM is not expecting further expansion (4 th phase to 1m units/year capacity) until volume pick-ups. Current utilization rate of the plant is at 50%-60% (current capacity of the plant is 750k units/year or 62.5k units/month). For the plant to be profitable, the plant needs to achieve 45-60k units/month.

• Nevertheless, OMI group has shown positive progress in 2Q17 as indicated by the marginal positive EBITDA (cash breakeven) being reported for Automotive Components segment. Management has been gradually improving the plant’s efficiency by reducing process rejection rate and material rejection rate. 2H17 model launches within the group will be:
  • Perodua – new MyVi,
  • VW - Golf GP & CC, and
  • Volvo - S90 T8 (CKD).

Risks

• Prolonged tightening of banks’ HP rules.

• Slowdown in the Malaysian economy affecting car sales.

• RM depreciation.

• Successful turnaround of OMI.

Forecasts

• Unchanged.

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 unchanged TP of RM2.54 based on SOP.

Source: Hong Leong Investment Bank Research - 25 Aug 2017