We recently met with MBM Resources’ management for an update on the company, reaffirming our view that the company remains in a transitional phase of investing to secure the longer-term future of the company. MBM already trades at P/E multiples that are near the sector average. The stock is already close to being fairly valued in our opinion. Maintain NEUTRAL and MYR4.10 target price. 

- 1Q13 earnings hit by cut throat competition. MBM’s 1Q13 results were below expectations although we continue to expect improving profitability in subsequent quarters. Management revealed that competition in the automotive retailing market was especially intense during 1Q13. The strong build-up in channel inventory in the preceding 4Q12 from year-end wholesale incentives, resulted in an escalation in price competition during the quarter as dealers discounted aggressively to clear 2012 inventories. The low vehicle production in 1Q13 was also negative for autoparts suppliers. The production of Proton vehicles during the quarter dived 38.4% and 35.5% q-o-q and y-o-y respectively. Auto parts manufacturers overall were squeezed by pricing pressures. 

- Investing for growth. MBM’s various investments to increase the group’s manufacturing exposure remains in the early gestation stages. These include the OMI alloy wheel plant, Hino manufacturing plant and Perodua plant expansion. These investments will only begin to bear fruit from 2015 onward. The majority-owned alloy wheel plant is expected to be a drag on earnings up to mid-2014 at least. 

- Awaiting the NAP. The long-awaited National Automotive Policy is expected to be announced later this year. While regulatory risk has been a major concern for the industry, the victory of the incumbent BN coalition at the recent polls has allayed fears somewhat with the Government reiterating its intention to gradually lower car prices over five years, thus minimising shocks to the industry during the intervening period. We expect non-national car sales to be steady while national cars are a hedge against an acceleration of the depreciation of used vehicles from the planned lowering of car prices owing to their relatively low absolute prices.

Source: RHB