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MBM Resources: Gearing Up For Growth
By: Ong Qiuying
Articles (131) Profile

The automotive sector under the consumer services industry is set to see another good year despite challenging times on top of the estimated 3.2 percent year-on-year growth in 2013. Frost & Sullivan expects vehicle sales to grow 4.2 percent to 675,000 units in 2014, driven by positive economic conditions and continuous investment flow.

However, credit tightening and further subsidy rationalisation initiatives by the government might have an impact on total industry volume (TIV) for automobiles this year. While MIDF Research forecasts lower TIV growth of 2.4 percent in 2014 to 668,000 units, RHB Research expects auto sales to continue growing albeit at a slower pace with a forecast of 675,000 units in 2014.

Without a doubt, consumers will be burdened with increasing cost of living, affecting the affordability of car ownership. But given the right pricing, price-sensitive consumers will still opt to own cars due to convenience and poor public transport infrastructure in Malaysia.

Furthermore, the government’s implementation of the single layer 6 percent in goods and services tax suggest a possibility of a net reduction in tax cost as auto players are currently paying a sales tax of 10 percent on vehicles sold, which is passed on to consumers. According to AmResearch, any savings could likely be given to consumers in the form of discounts and cheaper new variants. With an “Overweight” on the sector, the house’s top pick is MBM Resources.

Targeting to achieve RM4 billion in revenue by 2015, MBM’s revenue looks set to benefit from the consumers’ changing trend towards cheaper and smaller cars, or “down-trading”, that will in turn benefit national brands like Proton (DRB-Hicom) and Perodua (UMW & MBM Resources).

Over the last few years, MBM has been investing heavily to expand its distribution network, upgrade its facilities and extend its manufactured range of automotive parts; all in a bid to gear up for potential market opportunities that may be coming its way!

Company Profile
MBM is an automotive group with its core businesses in the distributorship and dealership of major international brands of vehicles in Malaysia as well as automotive parts manufacturing. Started out with an exclusive distributorship of Daihatsu motor vehicles it secured in 1980, MBM also has stakes in Perodua, Hino Motors Sales Malaysia and Federal Auto Holdings, allowing the company to pursue a multi-brand strategy to become a top dealer for international brands including Volkswagen and Mitsubishi.

Financial Performance
For the nine months ended 30 September 2013, MBM’s revenue inched up marginally by 0.6 percent to RM1.75 billion from RM1.74 billion while earnings dipped 0.9 percent to RM105 million from RM105.9 million. For the quarter, revenue slipped 4.9 percent to RM556.3 million from RM585 million while earnings fell by 1 percent to RM35.1 million from RM35.5 million.

The decline in earnings was due to lower vehicle sales of the continental makes which were affected by the intense competition in the premium car segment as well as startup costs of the new alloy wheel plant although contribution from associates improved 21.1 percent year-on-year to RM38 million in 3Q13 contributed by favourable Yen exchange rate. The introduction of the Perodua S-series also registered strong growth, helping to partially offset the lower revenues from motor trading and expansion costs.

Latest Developments
• MBM has signed a memorandum of understanding (MOU) with China’s SAIC Motor Corporation to explore the possibility of reviving the iconic MG marque in Malaysia with ongoing discussions and feasibility study. The MOU is in effect until 11 April 2014.

• MBM will continue to invest in its manufacturing exposure, which are in the early gestation period, including the Oriental Metal Industries (M) alloy wheel plant, Hino manufacturing plant and Perodua plant expansion. Its Perodua unit will be spending RM1.1 billion to complete a new production plant in Rawang, slated to be fully operational by second half of 2014 while non-Perodua segments are expected to see growth over the next two years on the back of RM230 million in capital expenditure.

• Perodua’s sales rose 3.7 percent year-on-year to a record high of 196,100 units in 2013. Based on the estimated total industry volume of 653,800 units last year, Perodua anticipates a market share of 30 percent for 2013, making Perodua the most preferred automotive company for eight years in a row. It is targeting a 0.2 percent growth to 197,000 units for 2014.

Brokers’ Recommendations & Catalysts
There is a positive outlook for MBM given its relatively cheap valuations, aggressive expansion over the last couple of years in its multi-brand strategy as well as in vehicle assembly to become an integrated automotive player. Its stake in Perodua also enables it to ride on the stronger demand for cheaper models.

• AmResearch highlights that Perodua will also see a doubling in capacity by mid-FY14 (to 400,000 units/annum) from a new, highly automated plant (comparable to Daihatsu’s plants in Japan). Coupled with Malaysia’s position as a key overseas market for Daihatsu (accounting for almost half of Daihatsu’s overseas volumes on its estimates), Perodua looks well positioned to become one of Daihatsu’s key export hub. AmResearch maintains “Buy” on MBM with a fair value of RM4.35 per share.

• Hong Leong Investment Bank also noted the sales momentum Perodua is expected to continue on when it launches its new Viva replacement by 2H14 coupled with the doubled production capacity and target for export market, given the aggressive plans of the exports of the national cars that would benefit MBM’s automotive parts manufacturing segment. The house maintains “Buy” with target price of RM4.45.

Source: FactSet

This article is brought to you by Bursa Malaysia Berhad. The research in this article was conducted independently by Pioneers & Leaders (Publishers) Pte Ltd (“Pioneers & Leaders”) and the views and opinions expressed in this article are Pioneers & Leaders’ own and do not represent the views and opinions of Bursa Malaysia. Bursa Malaysia does not warrant or represent, expressly or impliedly as to the accuracy, completeness and currency of the information in this article. In no event shall Bursa Malaysia be liable to the reader or any other third party for any claim howsoever arising out of or in relation to this article.
Qiuying oversees the construction and real estate investment trusts sectors at Shares Investment.

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