MBM Resources - 1Q15 temporary setback, earnings inflection intact BUY, 26 May 2015

We maintain our BUY call on MBM with a slightly lower fair value of RM3.70/share (vs. RM3.80/share previously) after a discussion with MBM this morning. We trim our FY15F earnings by 4% to conservatively reflect a gradual recovery from the 1Q15 blip in earnings. The steep fall (-64% YoY) in Hino’s invoiced sales in 1Q15 were driven by a freeze in stock purchases by dealers given uncertainties on the latter’s ability to fully claim back the previous sales tax when the GST is implemented.

Although Perodua recognised a 13% QoQ rise in invoiced sales, this was net of stock returns by dealers because of the same factor mentioned above, i.e. Perodua was also affected, but net-net it still recorded a growth because of the sheer volume of the Axia. As a result of the contraction in Hino volumes, the 42%-owned Hino unit (manufacturing and distribution combined) recorded a RM1.7mil net loss (MBM’s net share of the losses) in 1Q15 vs. a typical 20%-25% contribution to associate earnings. Our back-of-the-envelope calculation suggests that if Hino had maintained its usual quarterly earnings run rate, MBM’s 1Q15 associate earnings would have been up by a whopping 48% YoY (4Q14: +40% YoY) vs. the reported +9% YoY.

We understand that Hino sales had recovered almost immediately after the GST implementation, whereby April invoiced sales for Hino registered an 8% YoY growth (which is already at profitable sales levels), with the momentum continuing into May. As such, the 1Q15 earnings weakness looks like a temporary blip and should recover in the coming quarters, though how sharp a recovery it is, remains to be seen. On Hirotako, price and margin pressure are faced from both Perodua and Proton (volumes come mainly from Perodua) as well as the rising USD. Forex volatility took out an estimated ~10% of what would have been Hirotako’s earnings in 1Q15. Nonetheless, Hirotako is scheduled to renegotiate pricing to reflect latest forex levels by mid-year, which could mean improved earnings in 2H15.

Nonetheless, Hirotako is not the key driver of our BUY thesis but rather, it is the earnings inflection that we expect was, and is still expected, to be driven largely by Perodua. In hindsight, 2Q15 earnings should be driven by re-stocking at the dealership level despite general expectations of weak TIV (i.e. end sales) for the early part of 2Q15. 

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