Results: MBM Resources (MBM MK; BUY; TP: MYR4.20) - Momentary blip due to GST

MBM Resources (MBM MK; BUY; TP: MYR4.20): Momentary blip due to GST

• Below expectations but expect recovery over next few quarters. 1Q15 core net profit (excluding one-off property sales gain) of MYR24m (-27% QoQ, +4% YoY) met 17% of ours’ and consensus’ full-year forecasts. Headline net profit included one-off sale gain of its 70%-owned property development, Menara MBMR, amounting MYR10.7m.

The QoQ shortfall in core earnings was largely attributed to a 21% QoQ fall in associates’ contribution (i.e. 22.6%-owned Perodua and 42%-owned Hino) to MYR30m underpinned by low inventory stock-up by both Perodua and Hino dealers prior to the GST implementation on 1 April due to ambiguity in the process of reclaiming the 10% sales tax on potential unsold stocks by 1 April. We understand that Perodua may have also seen some reversal of sales from its dealers due to this ambiguity.

• Remain positive. Our forecasts are unchanged as we expect dealers to stock up again post GST implementation, having exhausted their inventories by end-April. As such, we expect a much better contribution from MBM’s associates (mainly Perodua) as vehicle sales remains strong. Tremendous demand for the Perodua Axia and Myvi will translate to strong earnings for MBM in FY15.
• Compelling recovery prospects and valuations. MBM remains our top pick in the sector riding on its positive three-fold exposure in Perodua as a (i) 22.6% shareholder, (ii) dealer of Perodua vehicles domestically and (iii) supplier of auto parts to Perodua. Valuations remain attractive at 7.4x/0.8x CY16 PER/PBV.