Although  MBM’s  1H14  results  disappointed,  we  note  the  sequential improvement  in  earnings  for  the  quarter  under  review.  Earnings  are looking like bottoming out this year, with 2015 l ooking more positive if its  new  businesses  break  even.  A  quicker-than-expected  ramp-up  of production  at  Perodua’s  new  plant  could  lift  associate  contributions. Maintain NEUTRAL and MYR3.05 FV, ahead of today’s analyst briefing.

2Q14  results  below  expectations.  MBM  Resources’  (MBM)  2Q14 earnings  improved  33.4%  sequentially  to  MYR31.2m  (-15.9%  y-o-y),bringing  cumulative  net  profit  to  MYR54.7m,  down  21.8%  y-o-y.  This reached  just  43.7%  of  our  previous  recurring  net  profit   estimate.  The variance  was  attributed  to  lower-than-expected  associate  contributionsdue  to  start-up  costs  incurred  at  its  42%-owned  Hino  Malaysia’s  new manufacturing facility. Core earnings from its auto trading and auto parts manufacturing businesses were in line with expectations.  Our  recurring profit estimate excludes earnings from property development due to be recognised  in  4Q14  upon  completion  of  Menara  MBMR.  A  first  interim dividend of 4 sen (1H13: 3 sen) was declared.

Auto parts business gaining traction. 1H14 revenue from auto trading declined 14.1% y-o-y,  due mainly to lower Volkswagen and commercial vehicle  sales.  However,  2Q14  auto  trading  sales  improved  8.9% sequentially,  driven  by  higher  commercial  vehicle  sales  (helped by  the Daihatsu  Gran  Max  facelift)  and  higher  Perodua  sales  (Perodua dealership volume  rose 19.7% q-o-q). Auto parts manufacturing revenue was  up  16%  y-o-y,  helped  by  a  7.9%  y-o-y  increase  in  total  industry production. The alloy wheel manufacturing business remained in the red.

Forecasts. We lower our recurring  2014 net profit estimate by 5.6% but leave our 2015 forecasts broadly unchanged.

Investment  risks.  These  include  weaker-than-expected  consumer discretionary  spending  and  an  extended  gestation  period  for  its  new businesses.

Investment thesis.  We reiterate  our  NEUTRAL  call on MBM. We also leave  our  FV unchanged at MYR3.05 (9x target  P/E on 2015F  earningsthat is in line with historical valuations), ahead of the analyst briefing later this morning.

Source: RHB