MBM Resources - BUY - 8 Aug 2008

MBM Resources - 1H08 results within expectations (Results Note)



Price: RM2.41

Target Price: RM3.05

Recommendation: BUY



· 1H08 net recurring profit of RM68.5m is in line with expectations accounted 52.1% and 55.4% of our previous forecast and market consensus respectively, buoyed mainly by the strong 1Q08 earnings.

· Strong topline, however, 2Q08 net profit declined by 40.1% QoQ to RM25.7m due mainly to lower contribution from associates despite Perodua and Hino recorded 7.7% and 22.8% higher vehicle sales QoQ, respectively. We believe this was due to profit margin squeeze attributed to the unfavourable strengthening of Yen against Ringgit. Our assumption assumes 1% change in average Yen against Ringgit to result in a 3-3.5% change in FY08 earnings.

· YoY, 2Q08 net profit decreased relatively lower by 16.3%, mainly as a result of the lower contribution from associates and higher effective tax rate of 14% vis-à-vis 8.2% in 2Q07.

· Special dividend of 6.0sen was on the table. In 2Q08, the Company declared a special dividend of gross 6.0sen per share (3 sen tax-exempt and 3 sen less 26% tax) in addition to interim gross DPS of 6.0sen. MBM aims to maintain its dividend policy of at least 12.0sen payout and is currently sitting on a net cash of 45.6sen per share with RM11.3m capital commitment as at 30 June 2008.

· FY08 and FY09 earnings forecasts adjusted downward by around 5-10% to RM124.9m and RM128.6m, respectively, mainly on the back of increasing challenges in the auto industry and economy as a whole. Despite improving production efficiencies and MBM is well-represented in both the commercial and fuel-efficient compact cars segments, higher material costs and further unfavourable currency movements may pose further downside risks to its earnings.

· Maintain BUY with lower target price of RM3.05 based on PER of 6.0x, in line with the auto industry. MBM is currently trading at an undemanding PER of 4-5x for FY08 and FY09. Solid earnings delivery and gross DPS of at least 12.0sen moving forward add attractiveness to the stock.