MBM Resources (MBM MK; BUY; TP: MYR3.42): Excitement from Perodua

MBM Resources (MBM MK; BUY; TP: MYR3.42): Excitement from Perodua

• Key takeaways from MBM’s 2Q14 results briefing:

                     I.        Hino’s new plant started production in March 2014 and has turn profitable in May 2014. Management guided for small losses or breakeven in FY14.

                    II.        Perodua’s new plant also commenced test production in August 2014 with full-scale production targeted by end-2014.

                   III.        OMI’s alloy-wheel plant will remain in the red to the tune of MYR20m in FY14 on delayed orders from extended audit by clients (i.e. VW and Honda). Perodua has approved OMI as a vendor and given significant orders commencing FY15.

• What’s Our View? Post briefing, we remain positive on MBM, for its improving near-term earnings prospects as new start-ups start to contribute. Nonetheless, we trim our FY15 earning forecast by 5% on lower alloy-wheel sales to 400k units (from 500k units). Management guided that VW is currently in the final stage of auditing OMI’s production. Securing VW’s approval as a vendor is a major positive which will raise OMI’s franchise value and alloy-wheel sales.

We also see upside potential in 22.6%-owned Perodua from the official launch of A-segment Perodua Axia in Sep 2014 and the new installed capacity which will boost domestic and regional sales. Perodua aims to sell 7.5k units of Axia monthly and we see 7%/19% upside to our Perodua vehicle sales forecasts for FY14/15 after a simulation to (i) incorporate the Axia sales in FY14/15 and (ii) remove Viva from the line-up. Imputing these new unit sales into our forecasts for MBM, we project that it could accrete 2%/13% to our current FY14/15 net profit forecasts, and up to 40sen (11%) to our current MYR3.42 TP based on unchanged 9x FY15 PER target.

• Valuations. We remain positive on MBM’s long-term prospects as it undergoes a transition period to grow and diversify its earnings base. At current valuation (7.3x FY15 PER supported by 3+% yields), MBM offers a good entry point to the robust auto parts manufacturing business and exposure to Perodua.

MBM offers a potential upside of 23% to our TP of MYR3.42, pegged at 9x FY15 PER.