We came away from MBMR’s 2Q15 results’ briefing still feeling NEUTRAL due to the group’s mixed outlook. Management featured highlights on further analysis of its 2Q15 results and prospects of its Motor trading and Auto Parts Manufacturing divisions. While we see no major excitement across all divisions in the near term, we view the decent Perodua sales (with 20% of the associate stake, contributing c.86% to the group’s FY15E PBT) as the saving grace for the group. Post briefing, we make no changes to our assumptions on earnings drivers. Maintain MARKET PERFORM with an unchanged TP of RM3.26 (based on an unchanged targeted 10.0x ascribed on FY16 EPS.

Further details on 2Q15 results. On a YoY basis, MBMR’s 2Q15 revenue dropped by 24% with lower sales seen across all segments. Muted demand due to the GST implementation was the main culprit affecting the sales of Motor trading division as well as the Auto parts manufacturing division (stock overhang, which leads to the lower TIP). On a closer look at the lion’s share revenue contributor - Motor vehicles trading (-26%, commanding c.88% of total revenue), DMSB- Daihatsu & Hino trucks, DMMS - Perodua vehicles and Federal Auto - Continental makes, all recorded weaker sales YoY with DMMS suffered the least at a mere -1.5%. Meanwhile, sales of Auto parts manufacturing (commanding c.12% of total revenue) also declined by 2.3%, in line with lower TIP. While the group’s EBIT level made RM2.2m losses, PBT recorded profit at RM33.9m (-7.1%) superseded by the earnings from its associates - Perodua (+25%) and Hino (3.3%). Special dividend of 3.0 sen was a positive surprise to us. Management noted that the one-off payout was rewarded from the earnings gained from the property sales of Menara MBMR’s development.

Headwinds persist in the motor trading division. Management’s cautious tone reaffirmed our view that the trading environment will remain challenging for the remaining 2H amid the uncertain economic conditions. Meanwhile, we also believe margin compressions to be the key trend for car dealers as they will turn more aggressive on the A&P activities for the remaining months of 2015, to make up for the lagging sales caused by weaker consumer sentiment in 1H. While we understand that the growing after sales business could partly cushion the downside, this does not alter our conservative view given its immaterial contribution (of c.30%) to the earnings of motor trading.

Light at the end of the tunnel could only be seen in FY16 for Auto parts manufacturing division. Management noted that the sales volume for alloy wheel in FY15 could only come in around 200k (over 500k capacity). While we see no major excitement across this division, we believe that its OMI alloy wheel’s operation should see narrower losses in FY15 given the higher production volume (recall that OMI alloy registered LBT of c.RM25m in FY14). Moving forward to FY16, management believes that net breakeven could be seen at 500k units (over 750k capacity) with more contracts to be expected from Perodua. Capex-wise, it will be at RM18m for the additional 250k additional capacity coming on stream in 4Q15.

Silver lining still the associate earnings. Perodua (20% owned by MBMR) had in last month announced their sales figures for the 1H2015 which saw an increase of 14.8%. This amounted to a sales figure of 108.5k vehicles sold as compared to 94.5k in 1H2014 which is on track to achieve its 208k units guidance (vs. our current 2015 forecast at 205k units), a decent +6% growth visa- vis total Malaysia’s TIV of +0.5% by MAA. Coupled with the earnings contribution from Hino Motors, we expect associate earnings to grow by 4%, representing 94% of the FY15E PBT. 

Source: Kenanga Research - 21 Aug 2015