MBM Resources sees challenging 1QFY15 for its motor trading unit

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MBM Resources Bhd
(March 3, RM3.29)

Maintained market perform rating with higher target price (TP) of RM3.52. We tweaked our estimate financial year ending Dec 31, 2015 (FY15E) net profit (NP) marginally upwards by 1% for housekeeping purposes. 

We have also introduced our FY16E NP of RM150.1 million (+9% year-on-year [y-o-y]) with earnings growth mainly premised on its Oriental Metal Industries (M) Sdn Bhd (OMI) alloy wheel division turning profitable. 

Subsequently, our TP has been raised to RM3.52 from RM3.06 as we have also ascribed a higher targeted 10 times price-earnings ratio (PER) (from nine times), which is at its three-year average forward PER in lieu of its improving earnings outlook.

On a y-o-y basis, the fourth quarter (4QFY14) revenue remained pallid at RM417.7 million (-0.8%) with weaker revenue seen across all segments. 

On a closer look at the lion’s share revenue contributor, namely motor vehicles trading (-0.1%, commanding about 90% of total revenue), marginal sales growth (0.9%) from DMM Sales Sdn Bhd, one of the subsidiaries, which trades Perusahaan Otomobil Kedua Sdn Bhd (Perodua) vehicles, was negated by other subsidiaries Daihatsu (Malaysia) Sdn Bhd, which deals in Daihatsu and Hino trucks (-3.8%) and Federal Auto, which deals in continental models (-6.8%), no thanks to the muted consumer spending. 

Meanwhile, auto parts manufacturing (commanding 10% of total revenue) declined by 7.4% due to lower deliveries with declining demand from major carmakers. 

While the group’s earnings before interest and tax declined by 79%, dragged down by ongoing high fixed cost, profit before tax jumped 20%, driven by its associate Perodua (up 40%) stemming from the overwhelming responses to Perodua Axia.

Management expects a challenging 1QFY15 in its motor trading division due to the cautious consumer sentiment amid uncertainties over car prices from the implementation of the goods and services tax (GST). 

We also see margin compressions to be the key trend for car dealers as they are aggressively paring down old inventories to avoid the additional tax that may arise post-GST. 

While we understand that the growing aftersales business could partly cushion off the downfalls, this does not change our conservative view given its marginal contribution (of about 30%) to the earnings of motor trading.

While we see no major excitement in this division, we take comfort from the management’s view that MBM’s OMI alloy wheel operation should see narrower losses in FY15 (recall that OMI alloy registered loss before tax of RM25 million in FY14), with operational breakeven to be seen in FY16. 

Note that the management’s optimism stems from the higher sales volume of 300,000 (over 500,000 capacity) with several contracts already secured from original equipment manufacturers or OEMs, and replacement and maintenances or REMs in FY15 with more contracts expected in FY16. 

As for capital expenditure, it will be RM15 million for the 250,000 additional capacity in 4QFY15.

Perodua (20% owned by MBMR) had recently guided its 2015 total sales to be at 208,000 units (versus our current 2015 forecast of 205,000 units), a decent 6% growth visa-vis total Malaysia’s total industry volume of 2% by the Malaysian Automotive Association. — Kenanga Research, March 3


This article first appeared in The Edge Financial Daily, on March 4, 2015.