Review

• MBM Resources Bhd’s (MBM) FY16 core net profit of RM86.9mn (YoY: +3.4%) came in above ours but within consensus expectations, constituting 106% and 103% of estimates respectively. This is after excluding one-off impairment of goodwill of RM24.9mn. However, revenue was within expectations, accounting for 101% of our estimates.

• The slight deviation was mainly due to greater than expected contributions from its JV company, Autoliv Hirotako (QoQ: >100%, YoY: +51.8%). Note that 4Q contribution from the JV was approximately 4x greater than contribution in 3Q. According to management, there was some recovery of previous forex related costs.

• All in, FY16 core net profit was driven mainly by the Group’s associate company Perodua, where contribution was more than 100% of the Group’s core pretax profit. We note that MBM’s own business of motor trading and autoparts manufacturing reported EBIT losses in FY16.

• Motor Trading Division – FY16 revenue reduced slightly by 1.6% YoY, as a result of lower motor sales. Furthermore, the division was loss making at the EBIT level as compared to FY15 due to the weak Ringgit. The latter, coupled with lower volumes, resulted in significant margin compression.

• Auto Parts Division – This division saw a major increase in revenue for FY16 (+16.1% YoY) as volumes were boosted by new model launches by Perodua and Proton. However, losses widened further in FY16 as the alloy wheel plant has yet to achieve optimum production.

• MBM declared a second interim dividend of 3.0sen, which brought fullyear dividend to 6.0sen (FY15:10.0sen) and implies dividend payout of 38%.

Impact

• We reduce contributions from Perodua in-line with the sales forecast number of 202k units released by Perodua’s management. Following this, our earnings are reduced by 7.5%/6.1% for FY17/18.

• We also introduce FY19 earnings with core net profit growth of 2.1%. In addition, we incorporate FY16 figures into our earnings model.

Outlook

• We believe MBM’s prospects remain challenging due to heightened competition in the industry, particularly for the motor trading division. Furthermore, expectations of subdued TIV will also impact its business.

• Additionally, Perodua has guided for a lower sales target of 202k units in 2017. This will impact MBM’s associate contributions quite significantly. Also, note that whilst Perodua launched its first sedan in 2016, we do not expect any exciting new model launch in 2017.

• On a brighter note, the OMI alloy wheel plant may finally begin to turnaround in 2017 which will be a slight positive for the Group.

Valuation

• Following our forecast revision, our TP is reduced to RM2.04 (previous: RM2.20) based on 9x FY17 PER. We believe MBM is fully valued at this juncture, where it is trading 1.5x above historical PER mean. Maintain Sell.

Source: TA Research - 23 Feb 2017