Auto Statistics (July): MoM growth continues, Results: MBM Resources (MBM MK; Under review; TP: MYR4.20)

We have:

     I.        July’s auto statistics – within expectations

    II.        MBM Resources’ 2Q15 results – below expectations

Automotive (NEUTRAL) – MoM growth continues

• July 2015 TIV continues to strengthen, up 2% MoM to 58.6k units, despite a shorter working month due to the Hari Raya holidays. July 2015 TIV takes 7M15 TIV to 380.8k (-3% YoY), meeting 58% of our full-year forecast of 660k (-1% YoY).
• Cautious on auto earnings. Higher A&P expenses coupled with unfavourable forex exposure pose downside risk to auto earnings in 2H15.
• Maintain NEUTRAL. Our 2015 TIV forecast is unchanged. Amid market uncertainties and higher cost of living which leads to potential down-trading, our preference remains with MBM for its presence in the economical car segment via its 22.6%-owned Perodua.

Meanwhile, BAuto’s share price has retraced by 24% in the last two weeks as MYR’s weakness against JPY negatively impacts imported costs. While we see apparent downside risks to FY17/18 earnings if JPY/MYR rate persists at JPY100/MYR3.30, we believe that the selling on BAuto is overdone. As for FY15, downside is capped as recent hedging at JPY100/MYR3.15 (vs our FY16 assumption of JPY100/MYR3.03), indicated by management, should suffice to cover sales up till Dec 2015.Our forecasts are under review, pending a corporate update.

Results: MBM Resources (MBM MK; Under review; TP: MYR4.20) – Misses expectations

• 1H15 earnings below our and consensus forecasts. Declares 4sen interim (in-line), 3sen special (positive surprise) DPS. 2Q15 core net profit of MYR29m (+20% QoQ, -7% YoY) took 1H15 core earnings to MYR54m (-2% YoY), meeting 38%/37% of ours and consensus full-year forecasts – below expectations. Headline net profit included a one-off sale gain of its 70%-owned property development, Menara MBMR, estimated at MYR10.7m.

Against our FY15 forecast, the underperformance in 1H15 earnings was underpinned by:

                     I.        Slower-than-expected recovery in the motor trading division (EBIT: +20% YoY to MYR8m) from weaker sales (-13% YoY),

                    II.        Widening losses at its auto manufacturing division (operating loss: +62% to -MYR5m) due to higher operating costs and

                   III.        Lower JV contribution (-32% YoY to MYR9m) from 51%-owned Autoliv Hirotako due to cost pressures and lower demand from its major customers.

Saving grace came from higher associates earnings (+10% YoY to MYR65m), mainly from 22.6%-owned Perodua and 42%-owned Hino.

• Under review. We keep our forecasts unchanged pending a briefing today but place our BUY call and TP under review with downside bias. While short-term operational setbacks may pose some downside risks to MBM’s earnings, we believe that positive outlook on Perodua will eventually outweigh these temporary setbacks.

Remain positive on Perodua’s expansion domestically with (i) potential down-trading by consumers and (ii) the launch of a new sedan model in 2016. Perodua is also earmarked for higher export sales following its expansion in production capacity.

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