MBM Resources Bhd (Nov 9, RM3.42)
Maintain buy with a lower fair value of RM5.20 per share: We maintain our “buy†call on MBM with a lower fair value of RM5.20 per share(RM5.40 per share previously) given downward earnings revisions in this report following the announcement of its third quarter of financial year 2012 (3QFY12) results.
Our sum-of-parts (SOP) valuation still pegs MBM’s core earnings at 10 times and Perusahaan Otomobil Kedua Sdn Bhd (Perodua) earnings at 12 times.
MBM reported a net profit of RM36 million for 3Q, which brings ninemonth (9MFY12) earnings to RM106 million. The results were short of expectations, accounting for 64% of our FY12F earnings and 68% of consensus.
While we had expected earnings to bounce back strongly in the second half (2H), the recovery was held back by slower vehicle sales in 3Q — particularly in August and September as the market saw an overhang from expectations of a vehicle excise duty cut in Budget 2013 (which did not materialise).
Total industry volume (TIV) dropped by 3% quarter-on-quarter (q-o-q) in 3Q. We have trimmed earnings by 5% to 10% for FY12F to FY14F to reflect more conservative sales targets (mainly FY12F, for MBM’s various dealerships). Perodua associate earnings, however, were well in line with expectations.
On the bright side, 3Q marked an inflection point off the weak results in 2Q (net profit: +20% q-o-q). Industry production recovered by 2% q-o-q following an exceptionally weak 2Q (which was dragged down by plant closures and Proton’s decision to run down inventories). Production recovery for 3Q benefited MBM’s parts manufacturing division, which accounts for 76% of group earnings before interest and tax (Ebit).
Furthermore, we gather from industry sources that sales volumes have recovered off the weak August to September period. The absence of duty cuts in 2013, coupled with the ministry’s official indications of the absence of any plans to cut duties to bring down car prices will see pent-up demand return to the market in 4Q. Any recovery in October TIV serves to underpin our view.
Any aggressive discounting by industry players to hit sales targets in 4Q should drive the production rate higher, and this should support further recovery of MBM’s parts manufacturing division, which accounts for the bulk of group Ebit.
Oriental Metal Industries (M) Sdn Bhd’s alloy wheel plant is in the final stages of completion and is expected to be commissioned in early 2013. Management expects the plant to break even next year, with the initial customer being Perodua, which currently imports 60% of alloy wheel requirements.
From a valuation standpoint, MBM remains cheap at seven times FY13F earnings. At current market cap, MBM’s 20% stake in Perodua is valued at just four times FY13F price-earnings ratio (PER), a deep discount to the sector PER of 10 times. MBM remains our top sector pick. — AmResearch, Nov 9
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