We came away from MBM’s 2Q14 results briefing still keeping our CONSERVATIVE stance unchanged on its FY14 outlook given the ongoing transition period. Moving forward to FY15, however, we are feeling UPBEAT on its outlook which could see low hanging fruits such as: (i) upcoming contracts to be secured for its OMI Alloy plant starting from the end of 2014, (ii) new models launching by Perodua (i.e. Axia, and other models to cater for consumers that gravitate towards lower priced cars), and (iii) breakeven in the new plants of its associates. Since our generally contrarian UNDERPERFORM rating back in March 2013, MBM’s share price has declined by 19%. At the current valuation, MBM is trading at 8.1x FY15 PER (back to its average 4-year forward PER) and we see limited downside from here. While we leave our earnings forecasts unchanged, we upgrade our rating to MARKET PERFORM based on a higher TP of RM3.06 (from RM2.92) as we roll forward our valuation basis year from FY14 to FY15 by ascribing 9.0x PER, which is at the +0.5SD above its 4-year average forward PER.

Further details on the 2Q14 results. On a YoY basis, MBM’s 2Q14 revenue remained flat at RM565.6m (-1.4%) 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. While the group’s EBIT increased by 5% which was mainly helped by sustainable margins on vehicle sales on lower discount being offered as well as the higher margins from aftersales, its PBT declined by 10% given the lower vehicles sales in its associates’ results (Perodua and Hino) and start-up losses at its new manufacturing facilities.

Light at the end of the tunnel could only be seen in 2015. Management still keeps to its conservative tone in 2014 in light of: (i) the tighter financing conditions and intensifying competition that will continue to impact its motor trading sales as well as (ii) the start-up losses of its new manufacturing investments due to gestation period. The 1st point mentioned abive is in line with our conservative view as we believe that the financing grip will be felt more especially by the national marques where its targeted customer base (low to middle-income car buyers) are more susceptible to the cost push inflationary impact. Moving into FY15, we concur with the management view that the outlook should be better on the back of: (i) upcoming contracts that will be secured for its OMI Alloy plant starting from end of 2014, (ii) new models launching by Perodua (i.e. Axia, and other models to cater for consumers preference that gravitate towards lower priced cars) and (iii) breakeven in the new plants of its associates.

Measures to sail through the transition period. To smooth out the uneven curve, particularly in the motor trading sales, the group is: (i)securing more distributorship i.e. with the recent move by entering into a distributorship agreement with Iveco S.p.A, which we believe to penetrate particularly into the heavy vehicles/trucks with less competition as well as (ii) implementing aftersales facilities upgrade to boost its service intakes. Meanwhile on the automotive components manufacturing, with the facilities in place, the group has already started to ramp up its production with expectations of more contracts to be secured.

Source: Kenanga