MBM Resources (MBM MK; BUY; TP: MYR3.50; Upside: 24%): Stronger ahead

MBM Resources (MBM MK; BUY; TP: MYR3.50): Stronger ahead

• What’s New? 3Q14 net profit of MYR26m (-18% QoQ, -27% YoY) took 9M14 earnings to MYR80m (-24% YoY), meeting 74% of ours but just 68% of consensus full-year forecasts.

The QoQ drag in earnings was largely due to a 57% QoQ fall in EBIT from auto parts manufacturing, on (i) lower revenue and (ii) persistent losses at the alloy wheel plant. Also, associates’ contribution was weaker (-10% QoQ) from slower Perodua vehicle sales (-9% QoQ) as consumers held back purchases prior to the A-segment Axia launch in mid-Sep.

• What’s Our View? We expect earnings to rebound in 4Q14 driven by strong deliveries of the Perodua Axia which has received overwhelming responses from the public, recording bookings/deliveries of 46k/12k units within 2 months since its launch. As such, we have raised our Perodua FY14/15/16 vehicle sales forecasts by 15k/20k/15k units to 205k/220k/215k units. Correspondingly, our FY14/15/16 net profit forecasts are raised by 2% p.a..

Just to recall, MBM’s exposure to Perodua is threefold:

                      i.        Perodua is a 22.6%-owned associate which accounts for 80-85% of MBM’s bottomline, we estimate.

                     ii.        MBM distributes ~10-11% of Perodua cars sold in Malaysia via 51.5% owned DMM Sales (DMMS).

                    iii.        MBM supplies auto parts (i.e. seatbelts, airbags and wheels) to Perodua via wholly-owned Hirotako and 78%-owned OMI.

We reiterate MBM as our top pick within the auto space for (i) its exposure in our preferred small car segment, in view of the GST implementation and higher cost of living, via 22.6%-owned Perodua and (ii) recovery in earnings from its new start-ups (alloy wheels, Hino and Perodua plant).

Valuations. Current valuations are attractive at 7.3x/ 0.7x CY15 PER/PBV vs peers’ 13.1x/2.0x. Our new MYR3.50 TP, pegged on 9x CY15 PER, offers a 24% upside.

Expect consensus to re-rate. Consensus currently rates MBM a HOLD (71% of ratings) with an average TP of MYR3.30, below our TP of MYR3.50. With all negatives priced in after a 12% fall in its share price YTD, we believe that MBM is undervalued given its improved near-term earnings outlook due to stronger-than-expected demand for the A-segment Perodua Axia. We expect consensus to follow with upgrades on the stock.