The recent analysts’ briefing did not reveal any new information to alter our view on MBM. Our forecasts are unchanged. The company remains in a transitional phase of investing to broaden its revenue base from manufacturing and auto retail. Currency trends are currently going against stocks in this sector. FV lowered to MYR3.30 (from MYR3.50). Maintain NEUTRAL.

- Saved by associate contributions. MBM’s 1H13 EBIT contracted 32.8% y-o-y to MYR33.0m. Segmental EBIT from autoparts manufacturing fell 21.6% y-o-y to MYR28.6m, due to lower sales of steel wheels, start-up costs from its new alloy wheel plant and lower earnings from Hirotako due to pricing pressure. Motor trading EBIT fell 50.3% y-o-y to MYR7.8m, mainly from heavy discounting costs during 1Q13 to clear remnant 2012 inventory. This was offset by higher associate earnings (+20.9% y-o-y), which now makes up 75% of 1H13 pre-tax profit (1H12: 61.6%) 

- Management upbeat on 2H13. Management was upbeat on prospects for 2H13, citing improved automotive sales volumes, a low interest rate environment, upbeat market response to the Perodua S-Series and positive vehicle production volumes. Also positive is the trend towards higher vehicle safety specifications, given that the newly introduced Proton Suprima has six airbags, a first for a national car. While the Preve can also be easily retrofitted with a higher airbag count, Proton’s older models cannot be similarly upgraded without significant additional investment. Nonetheless, the trend for improved vehicle safety specification is a positive for Hirotako’s airbag business going forward.

- Headwinds to drag on earnings. Weakness in the MYR will affect margins in later quarters. We estimate that every MYR0.10 change in the MYR/JPY rate impacts MBM’s net profit by MYR7.5m. While the sale of steel wheels are picking up, start-up losses from its new alloy wheel plant will steepen in 2H13, after the commissioning of the facility starts the clock on depreciation. The plant is now not expected to breakeven until 2015.

- Investment case. We see few re-rating catalysts for the stock. Ascribing a lower target P/E of 8.5x (from 9.0x), a slight discount to the industry average (9.0-10.0x) and 12-month historical average of 8.8x, we lower our FV to MYR3.30 (from MYR3.50). Maintain NEUTRAL.

Source: RHB