Malaysia Automotive (Neutral), MBM Resources (MBM MK; BUY; TP: MYR4.20; Upside: 24%): Deep value re-rating play

Malaysia Automotive (Neutral) ‘Mar’velous jump in TIV Sales

• What’s New?

§  Mar 2015 TIV jumped 34% MoM to 67.3k units (+14% YoY), bringing 3M15 TIV to 168.3k (+5% YoY), meeting 26% of our full year forecast of 660k units (-1% YoY).
§  The impressive MoM TIV growth was seen across the board with Perodua (+21% MoM, +38% YoY), Honda (+59% MoM, +95% YoY) and Mazda (+51% MoM, +64% YoY) hitting their all-time-high monthly vehicle sales. In 1Q15, Perodua and Honda also led in terms of market share gain, adding 6.4ppts and 3.4ppts YoY respectively. Meanwhile, Proton and Toyota shed 4.0ppts and 5.5ppts YoY of market share respectively.

• What’s Our View? 

§  While the rebound in Mar TIV was stronger than expected, we do not expect forward TIV to sustain on this high-note having considered a weaker consumer sentiment amid higher cost of living post GST. As such, we expect TIV to contract in Apr from a high base in Mar which saw forward buying by consumers to lock-in their prices. Also, there were incentives (i.e. discounts and freebies) given by auto dealers to clear their inventories pre-GST.
§  Post GST, average new car prices for most major marques has reduced by 1%, replacing discounts and freebies given pre-GST by auto dealers, but we do not see this as a catalyst to sustain Mar’s high level of demand going forward.
§  Amid uncertainties in consumer sentiment, we maintain our 2015 TIV forecast of 660k, projecting a 1% contraction YoY, as we see risk of contraction in next 2 month’s TIV sales. Our NEUTRAL stance is maintained with no significant re-rating catalyst in sight. We continue to have BUYs on MBM and BAuto for their positive exposure in the (i) economical car market and (ii) suppressed Yen-denoted component costs. HOLDs on UMWH and TCM.

MBM Resources (MBM MK; BUY; TP: MYR4.20): Deep value re-rating play

• What’s New?

·         1Q15 results are expected to be solid from stronger deliveries of Perodua cars. We continue to expect MBM’s earnings to be anchored by its JV (Hirotako Autoliv) and associate (Perodua and Hino) contributions, accounting for 96% of 2015 pre-tax profit.

·         Also, its wholly-owned MBMR Properties will recognise sale for ~75% of Menara MBMR amounting to ~MYR180m (averaging MYR1k psf) in 1Q15. Assuming a 12% net margin, this could add ~MYR22m to 1Q15 net profit, which is not included in our forecast. Following this sale, we do not rule out a small special dividend.

·         Amid thin margins for its motor trading business, MBM aims to grow its higher margin car service revenue from ~MYR150m by 10% in 2015. As such, MBM has allocated capex of MYR8-10m to build 3 3S centres.

·         Internal expectation is also for losses at 78%-owned OMI Alloy to narrow in 2015 based on higher orders from Perodua and Proton. As such, we expect the overall auto part manufacturing division (including OMI Steel & Tyre Assembly and Hirotako Acoustics) to breakeven in 2015. MBM has also allocated MYR16-17m to up its alloy wheel annual plant capacity to 750k units from 500k units to cater for future demand (i.e. VW, Honda etc

• What’s Our View? 
• Our forecasts and views are unchanged. MBM is a deep value re-rating play (9x FY15 PER, 0.8x FY15 PBV) riding on Perodua’s strong near-term prospects. MBM is our Top Pick in the auto sector. BUY.