MBM Resources (MBM MK; BUY; TP: MYR3.60): Adding Iveco to its multi-marque distributorship model

MBM Resources (MBM MK; BUY; TP: MYR3.60): Adding Iveco to its multi-marque distributorship model

• What's New? In an announcement to Bursa Malaysia yesterday, MBM Resources, via wholly-owned F.A. Trucks, entered into a distributorship agreement with Iveco S.p.A for the sale and service of Iveco vehicles and genuine spare parts in Malaysia, effective 1 August 2014 and will remain in effect for an indefinite term until voluntarily terminated at any time by either party.

Iveco is an Italian industrial vehicle manufacturing company based in Italy, and wholly-owned by CNH Industrial Group. It designs and builds light, medium and heavy commercial vehicles (CV), quarry/construction site vehicles, city and intercity buses and special vehicles for applications such as firefighting, off-road missions, the military and civil defence.

Iveco has production plants are in Europe, China, Russia, Australia, Africa, Argentina and Brazil, with approximately 5,000 sales and assistance points over 160 countries. The worldwide output of the company amounts to around 150,000 units.

Iveco will be a new marque in Malaysia with no existing dealerships and service centres. While there should be no material impact on MBM’s financials in the near term, we expect MBM to incur initial capex in 2015 for set up of dealerships and service centres for its Iveco marque in Malaysia. The CV segment makes up 11%/12% of total TIV sales in 2013/1H14.

• Whats Our View?  We are neutral on this development. While adding Iveco into the list may enables MBM to expand its motor trading business, the vehicles distribution business is competitive and associated with low margins in general. Pending further clarity on MBM’s initial set up cost for Iveco’s dealerships, we keep our forecast unchanged.
• Valuations. We remain positive on MBM’s long-term prospects as it undergoes a transition period to grow and diversify its earnings base. While its operations outlook in 2014 appears unexciting, MBM is set to deliver a better set of results in 2015 as its new start-ups (1m-unit alloy wheel plant, Hino plant, and Perodua plant) start to contribute. At current valuation (7.4x FY15 PER supported by 3+% yields), MBM offers a good entry point to the robust auto parts manufacturing business.

MBM, as a well-known auto-parts (i.e seatbelts, airbags, wheels) manufacturer, could stand to benefit from increasing CKD activities in Malaysia since the revision of the National Automotive Policy early this year. Since then, MYR2b has gone into Malaysia’s automotive industry and Malaysia Automotive Institute (MAI) expects another MYR5-7b from the issuance of two new licenses to produce energy efficient vehicles (EEVs). 

MBM offers a potential upside of 22% to our TP of MYR3.60, pegged at 9x FY15 PER.