We  see  MBM’s  transitional  phase  of  investing  to  broaden  its  revenue base  from  manufacturing  and  auto  retail  continuing  into  2014.Recurring earnings will remain relatively flat in 2014 although reported profit will be buoyed by non-recurring property development earnings. We maintain our  NEUTRAL call and TP of MYR3.40.  The break-up value of the company is estimated at MYR3.95.

• Start-up  costs  drag  2013  earnings.  Management  said  during  the briefing  that  investments  made  to  broaden  the  group’s  business  base continued  to  incur  start-up  costs  that  were  higher  than  expected.  The new  Oriental Metal Industries SB (OMI)  alloy wheel plant  incurred startup losses of c.MYR10m in  2013.  Upgrading  FA Wagen’s Petaling Jaya showroom  and  workshop  also  severely  restricted  after-sales  capacity and  led  to  congestion  at  its  sister  facility  in  Glenmarie,  while  the establishment of a 3S Mitsubishi outlet in Shah Alam  also contributed to a higher cost base. Construction of the new Hino (42%-owned associate)manufacturing  plant  in  Sendayan  (due  for  commissioning  in  March)  is almost  complete.  The  new  Perodua  plant,  which  will  add  capacity  of 100,000  units  (single shift),  is also on track  to be completed by August. The  new  manufacturing  facilities  incurred  pre-operating  costs,  which resulted in associate contributions contracting by 14.8% y-o-y in 4Q13.
• Another  challenging  year  in  store.  Management expects the intense competition  in  the  market  and  cautious  consumer  sentiment  to  be  its biggest challenge in 2014.  While the OMI alloy wheel  plant  will ramp up production volume  in 2Q14 after securing new tentative orders, it is still expected to incur losses of about MYR12m and  will only break  even in 2015.  Volkswagen  Malaysia  has  aggressive  sales  targets  in  2014  that would  likely  require  new  dealerships  to  achieve.  MBM  will  likely recognise earnings  for  the  units sold in  Menara  MBMR  during  4Q14  –which will bump up earnings for the year by MYR23m.
• Forecasts.  After  updating  our  model  and  factoring  in  non-recurring property development  earnings,  we  lift  our  reported  2014 estimates  by 5.8%,  although recurring net profit is 8.6% lower  to  reflect the extended period of start-up losses from its nascent new businesses.
• Investment  case. We maintain  our NEUTRAL call  and  TP of MYR3.40, which was derived by  applying a  10x target P/E  (from  9x) to the revised recurring foward  EPS.  The target P/E is in line with the 9-12x  valuation for stocks in the sector.  We estimate the break-up value of the stock at MYR3.95, and value its stake in Perodua at a 12x P/E.

Financial Exhibits

SWOT Analysis

Company Profile
MBM Resources is a multi-brand automotive retailer for the Volvo, Volkswagen, Mitsubishi, Perodua and Hino marques. It also the distributor  of  Daihatsu  commercial  vehicles  and  owns  associate  stakes  in  Hino  and  Perodua.  The  company  also  manufactures automotive safety equipment.

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Source: RHB