We maintain our NEUTRAL call on MBM Resources but trim our fair value to MYR3.75 (from MYR4.10) after updating our MYR/JPY100 exchange rate assumptions. The company remains in a transitional phase of investing to secure the longer-term future of the company. With prospective P/E multiples that are close to the sector average, MBM looks close to being fairly valued.

- Revising exchange rate assumptions. Following comments by the U.S. Federal Reserve on QE tapering, the markets have been affected by the reversal of capital flows. This has resulted in some volatility in exchange rates. RHB Economics notes that the MYR is on a weakening bias and when capital flows normalise, MYR/USD will strengthen back to around MYR3.08 by end-2013. This volatility has rendered our previous MYR/JPY100 assumptions (2013: MYR2.96, 2014: MYR2.77) untenable. We are now revising our average MYR/JPY100 exchange rates for 2013 and 2014 to MYR3.10 and MYR3.00 respectively.

- JPY exposure mainly through Perodua. MBM’s JPY exposure stems mainly from 25%-owned associate Perodua and 42%-owned Hino Malaysia. Associate contributions now make up 75% of pre-tax profit. Accordingly, changes in Perodua earnings have a relatively significant impact on MBM’s consolidated profit. Following the change in forex assumptions, we trim our 2013-14 forecasts by 5.8% and 9.1% respectively.

- Risks. The main risks to our call include: 1) Regulatory changes; 2) Tighter financing environment; and 3) Weaker economy affecting car sales.

- Investment case.  With prospective P/E multiples that are close to the sector average, MBM looks close to being fairly valued. We retain our NEUTRAL call on the stock but lower  our fair value to MYR3.75 (from MYR4.10) derived from ascribing an unchanged 9x target P/E to revised 2014 earnings.

Source: RHB