AmWatch - MBM Resources : Earnings turnaround gains traction, potential dividend hike? BUY, 13 Mar 2015

STOCK FOCUS OF THE DAY

MBM Resources : Earnings turnaround gains traction, potential dividend hike?                                   BUY

We reaffirm BUY on MBM and nudge up our fair value to RM3.80/share (from RM3.70/share) after a recent briefing. Our fair value still pegs MBM at 10x FY15F EPS. Earnings recognition of the Axia is set to accelerate as production is ramped up from 7K-8K/month to c. 9K-10K/month. This bodes well not just for Perodua, but also for MBM’s parts units such as OMI and Hirotako (which count Perodua as their largest customers) as well as MBM’s Perodua dealership unit (DMMS), which accounts for 10% of Perodua TIV. The Axia entails bookings of some 68K units.

Gross margins were likely better for the Axia (vs. the old A-segment Viva) given the higher average price the Axia achieves – this is a key factor driving MBM’s outperformance in its recent 4Q14, i.e.  Perodua’s invoiced sales were up 12% QoQ, but earnings rose by 30%. OMI alloy wheel production will more than double from the current 12.5K/month to circa 33K/month by year-end driven by:- (1) three new export customers; and (2) supplies to new Perodua models. OMI is expected to further narrow its losses in the coming quarters and hit breakeven by end-FY15F.

A Volvo rebranding and a slew of overdue launches should stabilise Federal Auto’s revenue (FY14: -16%). Industry discounting is being rolled back, especially given the strong USD currently. MBM netted benefits of RM10mil from lower groupwide discounts in FY14. We tweak up our FY15F16F/17F EPS by 2.5%/1.8%/1.5% to factor in:- (1) a more aggressive margin assumption for Perodua given a favorable mix of higher variant sales of the Axia; and (2) improved prospects for Hirotako and OMI riding on massive recovery in Perodua TIV. Management alluded to higher dividend payout (FY14: 27%) going forward given the reduced capex requirement. At 8.4x FY15F PER, MBM is deeply undervalued relative to the sector PE of 12x.

Others :

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