MBMR ... Feb10

S & P Results Review & Earnings Outlook

• MBMR reported 2009 results that were ahead of expectations. Net profit for 4Q09 of MYR22.5 mln (+36.6% YoY and flat QoQ) brought 2009 net profit to MYR68.3 mln (-41.7% YoY), which exceeded our estimate by 8.4%.

• MBMR's better-than-expected earnings were attributed to stronger associate contributions, lower effective tax rates and higher operating margins after the JPY exchange rate moderated during the final quarter. Operating margin improved to 3.2% for 2009 from just 2.9% in 1H09, helped by the recovery in the domestic auto industry. 4Q09 total industry volume (TIV) gained 17.6% YoY but eased 5.4% QoQ.
Overall, TIV for 2009 registered a 2% decline. Sales of Daihatsu commercial vehicles fell 22.9% in 2009, although its Perodua retail sales operation registered a 2.8% gain in unit sales. MBMR’s motor vehicle division recorded a 30.8% decline in 2009 operating profit from a decline in unit sales and tighter profit margins.

• 2009 associate contributions of MYR54.1 mln (mainly from Perodua) were ahead of our estimates but still showed a 31.8% YoY contraction, due to higher average JPY exchange rates.

• Prospects in 2010 remain firm on the back of improving consumer sentiment. Earnings should also be helped by higher associate contributions from Perodua, given the strong reception to their newly launched Alza MPV. We lift our 2010 earnings estimate by 8.4% and introduce our 2011 forecasts. MBMR declared a second tax-exempt
interim DPS of 3 sen, taking the total DPS for 2009 to 6 sen.

Recommendation & Investment Risks
• We reiterate our Buy call and lift our 12-month target price to MYR3.10 (from MYR2.80).

• We continue to ascribe a target PER multiple of 8x to 2010 earnings and include a forecast net DPS to arrive at our target price. The target PER is benchmarked to peer PER multiples and is in line with the stock’s five-year trading average. Prospective PER of 6.7x is undemanding when compared against forecast 2010 earnings growth of 34.8% on offer.

• We expect to see a gradual improvement in demand for passenger and commercial vehicles going into 2010 as the domestic economy continues its recovery. Businesses are likely to consider expanding or replacing their commercial vehicle fleet as the economy improves – this bodes well for MBMR’s Daihatsu and Hino vehicle range.

• Risks to our recommendation and target price include an unexpected downturn in consumer and business spending, which could result in lower-than-expected vehicle sales. A sustained appreciation of the JPY and USD against the MYR would also be negative for margins. The thinly traded volumes also make the share price vulnerable to volatility, in our opinion.