MBM’s briefing session reaffirmed our expectations that 2015 will be a year when earnings rebound after two preceding years of investing in new manufacturing facilities that  include an alloy wheel plant and new facilities  at  Hino  and  Perodua.  With  valuations  undemanding,  we reiterate our BUY call on the stock with a higher target price of MYR3.80 (15% upside). MBM remains one of our Top Picks in the auto sector.

New  investments  to  pay  off  in  2015.  MBM  Resources’  (MBM)  semiannual  briefing  session  reaffirmed  expectations  that  its  capacity investments  will  start  to  pay  off  this  year.  It  invested  MYR344.8m  in capex  in  2012-2013  on  a  new  alloy  wheel  manufacturing  plant,  and expanded its showroom network in addition to new aftersales  servicing facilities. During this period, both 42%-owned associate Hino Motors and 25%-owned Perodua  also  built  new manufacturing plants.  While capex tapered off in 2014, start-up losses mounted during the gestation periodto  MYR50.2m  (see  Figure  3)  in  2014  (2013:  MYR16.5m).  We  expect alloy  wheel  losses to  narrow significantly  in 2015  as  production  ramps higher to meet new supply contracts. MBM will likely initiate Phase 3 at the  OMI  alloy  plant,  which  will  bring  total  annual  capacity  to  750,000 wheels.  It  is  also  well-positioned  to  meet  the  higher  demand  for automotive safety products.

Auto  trading  tough,  to  focus  on  aftersales.  The  outlook  for  auto trading  in  2015  remains  challenging,  given  shaky  consumer  sentiment.Consumer expectations for declining car prices also suggest  that  buyersare in no hurry to pull the trigger. With competition in the retail segment heating  up,  MBM  is  focusing  on  after-sales  servicing  to  tap  on  the growing pool of used vehicles. It  also expects the Volvo marque to do better this year, with the introduction of eagerly-awaited new models.

Forecasts and risks. Our 2015 forecasts are broadly unchanged but we lift  our  2015-2016  earnings  estimates  by  7.0% and  11.1%  respectively after factoring a stronger recovery in alloy wheels and better associate earnings.  Risks  include slower-than-expected economic growth, weakerconsumer  sentiment,  higher  interest  rates,  a  severe  tightening  of financing and severe forex fluctuations

Maintain  BUY.  We  lift  our  TP  to  MYR3.80  (from  MYR3.55)  after ascribing  a  higher  target  P/E  of  10.5x  (from  10x)  to  2015  earnings  to reflect the stronger growth profile. The target P/E used is in line with peer valuations of 8-14x.

Source: RHB