Highlights/ Comments

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

• 4Q17 results: After excluding massive impairments of goodwill, PPE and JV, core PATAMI improved 94.9% QoQ mainly from higher contribution from associates amounted to RM40.5m due to better demand for Perodua. Auto parts segment is still in the red although revenue increased to RM62.7m (17.8% QoQ) due to underutilization of OMI alloy wheel plant.

• Management decided on the kitchen sinking exercises in 4Q17 with RM253.3m impairment charges as it did not expect near term turnaround for OMI alloy wheel while overall domestic TIV was not exciting. However, they believe that impairment on PPE for auto parts segment which amounted to RM65.9m will reduce depreciation cost by c. RM300k/month and hasten the turnaround of the division.

• While the group’s alloy wheel production saw a huge jump to 301k units in FY17 as compared to 215k units in FY16, management foresee that the division will continue to incur losses in FY18. For FY18, management expects sales volume for alloy wheel to achieve at least 50% of the plant’s maximum capacity at 750k units per year mainly on orders from Perodua.

• MBM is currently supplying alloy wheels for the standard variant of the new Perodua Myvi and will be supplying 100% of the expected Perodua SUV, which will be launched by year-end. They guided that they will produce 10k units per month for the new SUV by 4Q18.

• Management has improved the alloy wheel plant’s efficiency by reducing process and material rejection rates to c.15- 16%. They expect to reduce further to 10-15% by improving operational control of the unit by year end.

• FY18 model launches within the group will be: 1) Perodua – new SUV; 2) VW – Arteon and Golf; 3) Volvo – XC40 (CBU); 4) Daihatsu – Granmax; and Mitsubishi – Xpander (MPV).

Risks

• Prolonged tightening of banks’ HP rules.

• Slowdown in the Malaysian economy affecting car sales.

• RM depreciation.

• Unsuccessful turnaround of OMI.

• Increase cost of input materials.

Forecasts

• We tweak our 2018-2019 earnings estimates marginally by +0.5% and +1.2% respectively to account for stronger associate contributions and consolidating 100% of OMI.

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 slightly higher TP of RM2.70 (from RM2.68) based on SOP.

Source: Hong Leong Investment Bank Research - 26 Feb 2018