We came away from MBM’s 4Q13 briefing still feeling CAUTIOUS as we believe that its FY14 outlook will remain bleak in light of challenging operational environment with lacklustre demand for its continental makes coupled with the trend of margin erosion in its motor trading segment. The company is now in a transitional period of charting its longer-term future. While we have confidence in MBM’s management ability to steer the company well, the current operational environment has prompted us to keep our conservative stance for now. Post-results, our earnings forecasts have been reduced by 9-14% after we factored in: (i) lower sales assumption of continental makes at Federal Auto and (ii) lower EBIT margin assumption at its motor trading segment. Consequently, our TP is reduced from RM3.66 to RM3.25 based on 9.0x FY14E EPS. Maintain UNDERPERFORM.

Further details on the 4QFY13 results. On a YoY basis, MBM’s 4Q13 revenue declined by 2.1% as the higher revenue from auto parts manufacturing (driven by increased demand from major car makers as well as the higher income from aftersales) was negated by lower sales of continental makes. Despite the weaker revenue, the group’s EBIT increased by 10%, mainly helped by a favourable Yen exchange rate, higher production of manufacturing division as well as the higher margins from aftersales. While the group recorded a flat PBT growth which was dragged down by the associates’ results on the back of higher marketing costs coupled with the start-up costs of new Hino manufacturing facilities, PATAMI grew by 10% thanks to lower taxation for the deduction of over provisions in prior years.

Headwinds in 2014. Management has sounded a more conservative tone in light of the more cautious consumer sentiment as well as intensifying competition. This concurred with our view that the whole automotive industry outlook could be overshadowed by cost push inflationary factor amidst the subsidy rationalisation. On that, we believe consumers will be more price sensitive and thus preference may gravitate towards lower priced cars. That said, while we are expecting a tougher business environment for its continental makes at its motor trading segment, we believe that the group’s dealership and strategic investment in associate Perodua are poised to benefit from higher preference for cheaper cars, thus buffering the impact from a tougher overall market.

Measures to sail through the rough sea. The group is now more aggressive in expanding its network i.e. securing more dealership beyond Klang Valley, as well as implementing aftersales facilities upgrade to protect its turf in the automotive industry. Meanwhile on the automotive components manufacturing, OMI Alloy is ramping up its production starting from 2Q14. That said, we are not expecting any meaningful rebound in the short-term as we gather that the breakeven volume will only come in later.

Our take from the post-results analysts’ briefing. The company is in a transitional phase of charting its longer-term future. While we have confidence in MBM’s management ability to steer the company well, the current operational environment has prompted us to keep our conservative stance for now. Post-results, our earnings forecasts have been reduced by 9-14% after we factored in: (i) lower sales assumption of continental makes at Federal Auto and (ii) lower EBIT margin assumption at its motor trading segment. Consequently, our TP is reduced from RM3.66 to RM3.25 based on a 9.0x FY14E EPS. Maintain UNDERPERFORM.

Source: Kenanga