Though 2016 will likely be tough for the auto industry, we expect limited downside for MBM Resources’ (MBMR) share price, which we believe is already close to the bottom. Stringent bank lending standards, weak consumer sentiment, unfavourable forex and intense market competition would all contrive to dent sales and crimp margins. Reiterate NEUTRAL, with MYR2.25 TP (vs MYR2.12, 7% downside), after updating our 10-year trough P/BV multiple to 0.55x (from 0.52x). While Perodua sales should remain somewhat resilient, there are few visible re-rating catalysts.

Pressure on volume and margins. We expect demand to remain limp through 1H16, after many buyers brought forward their purchase decisions into 4Q15. This was likely done to avoid the price increases implemented by some distributors beginning 1 Jan 2016, to reflect the weak MYR. Lackluster consumer sentiment should reduce the propensity for spending on big-ticket items. We expect the alloy wheel business to achieve breakeven in 2016. Perodua sedan only in 2017. Perodua sales should stay resilient, helped by some car buyers trading down to lower-priced cars. However, higher living costs and job security concerns would impact the middle-income segment, the target market of national car makers Proton and Perodua. The eagerly awaited Perodua sedan is not expected to debut until 2017. Forecasts and risks. We make minor tweaks to our 2016-2017 forecasts and introduce our 2018 estimates. Risks include a slower-than-expected turnaround of its alloy wheel business and weakness in the MYR.

Maintain NEUTRAL, tweaking our TP to MYR2.25. While valuations are close to bottom, there are few visible re-rating catalysts, with sector sentiment remaining unfavourable.

SWOT Analysis

Source: RHB Research - 25 Feb 2016