MBM Resources (MBM MK; BUY; TP: MYR3.00): Deep in value

MBM Resources (MBM MK; BUY; TP: MYR3.00): Deep in value

• Time to reap the benefits of past investments. We remain positive on MBM following last week’s briefing; 2H16 earnings should be much better than 1H16 with maiden contribution of the Perodua Bezza. Investments in the last three years (i.e. Perodua and Hino’s plants, OMI Alloy) should make a more significant contribution in the coming years. Our forecasts are largely unchanged (-1% for FY16-18) but we raise our TP to MYR3.00 (+11%) as we peg MBM on 10x FY17 PER (5-year mean valuations; from 9x) on improving outlook.
• Perodua’s contribution could surprise. Order taking for the Bezza model remains impressive with ~1k bookings recorded per day on average since its launch on 21st Jul (bookings could have hit >25k units as at end last week). Take-up for the top variant of this model remains above Perodua’s initial expectations of 40% of total. Against this backdrop, we see upside potential in Perodua’s earnings on the back of higher margins from accessories of the top variant. We make no change to our earnings estimates for now pending further updates from Perodua on (i) its booking/delivery progress for the Bezza and (ii) potential cannibalisation for its other models (i.e. Axia and Myvi).
• Operating efficiencies from higher volume. Associates’ contribution aside, we expect higher production in 2H16 for MBM’s auto parts manufacturing from the launch of Proton Persona, Proton Saga and Perodua Bezza; these manufacturing arms saw double-digit YoY volume decline in 1H16. While we have imputed volume recovery in our earnings model, we believe that there could be positive surprises from these entities on economies of scale on higher production volume. Our margin assumptions have yet to factor this in.