MBM’s 2Q17 net profit of RM16.2m came in below our and consensus full-year forecasts. The lower 2Q17 net profit yoy was due to: (1) lower vehicles sales and thus negatively impacting revenue, (2) lower associate contributions, and (3) margin compression. MBM declared 1.5sen DPS as compared to 3sen in 2Q16. We revise our FY17-19E earnings lower by 19-31%. Maintain HOLD with a lower TP of RM2.10 based on 9x FY18E EPS.

Earnings Miss in 1H17

MBM’s 1H17 revenue inched up by 2.6% yoy to RM822m, attributed to the better performance from both motor trading (+2.0%) and auto parts manufacturing (+6.7%) segments. 1H17 net profit declined by 4.3% yoy to RM35.6m. This was below our and consensus estimates, which accounted for 36% of our and consensus full-year forecasts, respectively. Deviation against our earlier expectations is mainly due to lower-than-expected associate contributions which declined by 8.8% yoy.

PBT Falls on Weaker Revenue and Associate Contributions

Sequentially, overall revenue fell by 3.4%, affected by weaker motor trading (-5.1%) but higher production volume by the alloy wheel plant and better ASPs from the tyre assembly line helped the auto parts manufacturing segment (+9.7%). Operating margin increased by a marginal 0.3ppt. Associate contributions fell by 14% to RM24.5m due to weaker Perodua sales, Hino truck and buses and decline of JV Autoliv Hirotako.

Maintain HOLD on Muted Outlook; Lower TP: RM2.10

We lower our 2017-19 EPS forecasts by 31%/20%/19% after imputing for weaker operating margins and lower associate contributions. We reduce our TP to RM2.10, after rolling forward valuations to FY18 based on unchanged target PER of 9x.

Risks to Our Call

Upside risks: i) improvement in consumer spending, which would lead to higher auto sales; and (ii) improvement in banks hire-purchase approvals. Downside risk: lower-than-expected car sales volume.

Source: Affin Hwang Research - 24 Aug 2017