We are NEUTRAL on MBM. Ascribing an unchanged 9x target P/E (industry average) to a fully diluted 2014 EPS, we trim our FV to MYR3.50 (from MYR3.75). Persistent weakness in the MYR will pressure margins going forward, exacerbated by ongoing start-up costs. We see few catalysts that could re-rate the stock higher with a forward P/E of 9.4x, on par with its peers’ valuations. The company declared a MYR0.03 interim DPS.

- Another disappointing quarter. MBM endured another lackluster quarter, with the 2Q13 profit of MYR37.2m (+13.4% q-o-q, +26.2% y-o-y) bringing its cumulative earnings to MYR69.9m (-0.8% y-o-y). This reached just 40.6% of our previous 2013 forecast and 44.4% of consensus. The deviation was mainly due to: i) higher expenses arising from the expansion of the motor trading branch network; ii) start-up costs from its newly commissioned alloy wheel  plant; and iii) lower-than-expected contributions from associate earnings due to overly aggressive JPY/MYR exchange rate assumptions.  

- Trading revenue rises. 1H13 revenue rose 3.4% y-o-y, helped by a 5.2% y-o-y improvement in trading revenue but offset by a 5.5% y-o-y decline in autoparts manufacturing. Total group vehicle sales rose 7.2%, outstripping the 4.1% y-o-y rise in total industry volume (TIV). Sales volumes were lifted by an improved share of Perodua vehicle dealership sales (+10.8% y-o-y), but offset by weaker sales of continental vehicles (Volvo and  VW) at Federal Auto. While autoparts manufacturing revenue rose 7.4% q-o-q, cumulative revenue still contracted y-o-y despite a 4.1% rise in total industry production (TIP) due to pricing pressure.

- Start-up costs drag margins. Group EBIT margin shrank to 2.8% during the period from 4.2% in 1H12 due to start-up costs incurred in expanding its auto distribution network and a new alloy wheel plant, in addition to price pressure from autoparts. Elsewhere, associate contributions rose 20.9% y-o-y due to favourable forex rates and a 4.3% y-o-y rise in Perodua sales. 

- Forecasts. We trim our 2013-14 forecasts by 12.6% and 6.5% respectively after factoring in higher start-up costs and assuming a weaker MYR/JPY100 exchange rate of MYR3.20 for both 2013 and 2014 from MYR3.10 and MYR3.00, respectively. 

Source: RHB