Highlights

Strong sales of Perodua (from the introduction of S-series) in 1H13, offsetting the impact from the lower sales/earnings of Federal Autos (Volkswagen and Volvo) as well as OMI and Hirotako (lower orders for autoparts and components from national cars ahead of the general election).

VW’s Principal is likely to launch aggressive marketing campaign in coming month to boost VW sales in order to achieve 2013 sales target.

Mitsubishi sales continued to improve on high demand of Mirage. We expect Mitsubishi sales to improve in 2H with the upcoming launching of new model Attrage.

Volvo recently launched V40 at <RM200k has received good respond and hoped to boost sales in 2H13.

Expect strong 2H13 demand for autoparts and components from the national marques on the successful launching of Perodua S-Series (mid-April), Proton Saga SV (mid-June) and Proton Suprima S (mid -August). Suprima S required 6 Airbags vs. normal requirements of only 2 airbags.

OMI is expected to recognize loss of RM10m (including depreciation of RM2.5m) in FY13 from the high start-up cost of the new Alloy Wheel Plant. The new plant is only expected to turnaround by 2015.

The weakened JP¥ (against RM) contributed positively to MBM’s earnings, mainly through Perodua (20% COGS in JP¥) and Hino (100% COGS in JP¥).

MBM has minimal exposure to the appreciation of US$ through OMI (raw material cost) as OMI contributed only 5% to group revenue and 1% to group EBITDA in 1H13.

Risks

• Prolonged tightening of banks’ HP rules.
• Slowdown in the Malaysian economy affecting car sales.
• Global automotive supply chain disruption.

Forecasts

Fine-tuned our models, cut FY13-15 earnings by 11-13%, after accounting for the negative impact of general elections in 1H13 and expansion plans (higher start-up cost). We have yet to impute the potential earnings from property development.

Rating

BUY

Positives –

• Cheap valuations.
• Expansion into vehicle assembly to complete its strategy of becoming an integrated automotive player.
• Strong sales of Perodua.
• Weakened Yen against RM.

Negatives –

• Does not have strong foreign automotive partners as compared to UMW (with Toyota) and TCM (with Nissan).
• Margin squeeze on components and parts segment.

Valuation

Maintained BUY recommendation but with lower Target Price of RM4.70 based on SOP to reflect lower forecasts.

Source:Hong Leong Investment Bank Research - 26 Aug 2013