Thursday, December 5

MBM buckles up for bumpy roads ahead in auto market

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KUCHING: MBM Resources Bhd (MBM), a public-listed automotive retailer and parts manufacturer, is facing challenging times moving forward in the midst of a fiercely competitive environment as it sets to eventually reap the benefits of long term investments.

RHB Research Institute Sdn Bhd (RHB Institute), on a recent visit to the company’s management, opined that MBM remained in a transitional phase of investing to secure the longer-term future of the company.

“MBM’s various investments to increase the group’s manufacturing exposure remains in the early gestation stages.

“These include the OMI alloy wheel plant, Hino manufacturing plant and Perodua plant expansion. These investments will only begin to bear fruit from 2015 onward.

“The majority-owned alloy wheel plant is expected to be a drag on earnings up to mid-2014 at least,” the research house said in a stock update yesterday.

MBM’s results for the first quarter of 2013 (1Q13) were below expectations although RHB Research continued to expect improving profitability in subsequent quarters.

Net profit for the quarter fell 20.2 per cent year on year (y-o-y) to RM32.8 million due to a higher base in 1Q12 that was boosted by a non-recurring property gain estimated at RM4.8 million.

The top line grew 7.4 per cent q-o-q and 13.4 per cent y-o-y to RM616.6 million mainly from higher revenue from its motor trading business (up 19.1 per cent y-o-y, and 25.1 per cent q-o-q).

The group revealed that competition in the automotive retailing market was especially intense during the quarter from price wars as dealers discounted aggressively to clear 2012 inventories.

The low vehicle production in 1Q13 was also negative for auto parts suppliers. The production of Proton vehicles during the quarter dived 38.4 per cent q-o-q and 35.5 per cent y-o-y. Auto parts manufacturers overall were squeezed by pricing pressures.

Meanwhile, the newly completed RM103 million OMI alloy wheel plant is now undergoing trial production and have installed capacity of 500,000 units by end-2013 and 750,000 by end-2014.

“Management is now focusing on consistency and quality of production. Some initial trial orders have been received from various customers including Perodua.

“Management continues to guide for start-up losses of RM6 million to RM8 million this year (1Q13: about RM1 million). Its ability to break-even in 2014 will depend on the volume of secured orders.

“We expect MBM’s core earnings (excluding associate contributions) to decline sharply in 2013 and 2014, with reported net profit growth coming largely from Perodua that will enjoy wider margins arising from a weaker yen.

“The weak growth profile of its core business is a function of the investments that are being made to raise the contribution of manufacturing earnings,” RHB Research said as it maintained MBM’s 2014 fully diluted earnings per share and a target price earnings ratio (PER).

“MBM already trades at price earnings multiples that are close to the sector average. The stock is already close to being fairly valued in our opinion,” it concluded while maintaining the stock’s fair value of RM4.10 per share, a few sen above the last traded price.