MBM Resources - BUY - 11 Aug 2008

MBM Resources - Expect stable performance (Company Update)



Price: RM2.42

Target Price: RM3.05

Recommendation: BUY



· 2Q08 net profit declined by 16.3% YoY to RM25.7m due primarily to lower contribution from Perodua mainly on the back of upgrading work of the manufacturing plant resulted in disruption to its production. Utilisation rate of the plant dropped to about 80% from the usual >90% in April before picking up again beginning June. Nevertheless, Perodua built up sufficient inventories to support the higher sales demand which saw an increase of approx. 7.7% QoQ.

· Unfavourable FOREX movement compounded the decline. Average Yen rate against Ringgit in 2Q08 was incurred higher at RM3.06/JP¥100 vis-à-vis RM2.98/JP¥100 in 1Q08 and RM3.00/JP¥100 in 2Q07. Our assumption is 1% change in average Yen against Ringgit to result in a 3-3.5% change in FY08 earnings.

· Daihatsu and Hino however outperformed underpinned by robust demand for their commercial vehicles. Contributions to PBT from Daihatsu and Hino increased substantially despite the unfavourable FOREX movement which was mitigated by higher sales volume along with a successful price increase in May. According to management, tighter APs imposed on import of rebuilt trucks will ease the stiff competition faced previously.

· FY08 and FY09 earnings forecasts are maintained at RM124.9m and RM128.6m, respectively.

· Prospect. We maintain our view on MBM to record stable earnings going forward due mainly to the Group's exposure to Perodua, which we believe is the least affected by the increase in petrol price and hire purchase loan rate. Perodua sales should record higher in July; however, we are keeping our Perodua estimate sales of 158,900 units for FY08. A new volume-selling model scheduled to be launched next year which we believe to be a MPV, whilst a Myvi facelift model which is due to be introduced by end of 3Q or in 4Q are expected to stimulate sales and bring excitement to the industry.