We came away from MBMR’s 2Q17 results briefing with our cautious view unchanged premised on the bleak industry outlook as well as the group’s mixed prospects. Maintain MARKET PERFORM with unchanged TP of RM2.20.

Further details on 2Q17 results. On a YoY basis, 2Q17 revenue increased by 3% with better sales seen across all segments. On a closer look at the lion’s share revenue contributor- Motor vehicles trading (+2%, commanding c.90% of total revenue), the sales drop in DMSB- Daihatsu & Hino trucks (-55%), DMMS- Perodua vehicles (- 10%) and Federal Auto- Continental makes (-43.3%) was compensated by better sales in total service throughput at 46,752 units (+3%). Meanwhile, sales of Auto parts manufacturing (commanding c.10% of total revenue) also improved by 7% underpinned by higher demand for its tyre assembly services and alloy wheels by major customer. However, at the bottom-line, core PATAMI was down by 14%, dragged by extended losses in auto-parts manufacturing segment (-8% on below-optimal production), further hampered by weaker associate earnings (-10% due to adverse currency translations) and jointly controlled entity (-50% amid lower total industry production).

Headwinds to persist in the motor trading division. While there will be a few new attractive models launching from the marques that MBMR is carrying, we believe the group’s trading margins will continue to come under pressure on the back of stiff competition amid lacklustre consumer sentiment. To ride through the cut-throat margins environment, management’s strategy is to grow aftersales revenue that commands higher margins. While we lauded management’s move, we believe the additional earnings from the aftersales throughput are insufficient to make up for the shortfall from motor trading division, at least in the near-term given the current bleak economic outlook.

Light at the end of the tunnel could only be seen in FY18 for Auto parts manufacturing division. While the group’s alloy wheel production saw a huge jump to 126k units in 1H17 as opposed to 65k units in 1H16, we gather that, at the current pace, breakeven could only be seen in FY18 (with 550k units produced). For FY17, management expects sales volume for alloy wheel to achieve at least 50% of the maximum capacity at c.375k units (maximum capacity at 750k units) mainly on orders from Perodua. Meanwhile, on its jointly-controlled entity- Autoliv Hirotako (which produces Airbags, Steering wheels and seatbelts), we expect to see flat revenue growth in FY17 amid the shrinking demand of Proton, which is its largest customer.

Associate earnings to be compressed by adverse currency translation. Perodua (20% owned by MBMR) had early of this year announced their sales targets of 202k for 2017 (currently for 7M17: 118k). While we believe the sales target is achievable given its topselling models such as Axia, Myvi and Bezza still dominate the market volume, we view the adverse currency translation will continue to suppress its associate earnings margins given the 10% imported components on Perodua based on our estimates . No changes in earnings assumptions. Maintain MARKET PERFORM with unchanged TP of RM2.20, based on an unchanged 10.0x PER on FY18E EPS. While we believe the group will benefit from the strong market reception of the Perodua affordable variants, challenges will still persist from: (i) lacklustre consumer sentiment on the back of rising cost of living, (ii) tighter financing conditions, and (iii) intense domestic competition due to higher operating and import costs on unfavourable currency fluctuations.

Source: Kenanga Research - 25 Aug 2017