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Friday, May 24, 2019

MBM Resources - Leveraging on Perodua

MBM reported core PATAMI of RM42.0m for 1Q19, above HLIB expectation and consensus, following better than expected contribution from its associates (mainly Perodua) and improved dealership profits. MBM has also announced the 22% stake disposal in both its 42% owned HMS and HMM for RM74.4m (translating into 2018 P/E of c. 21x) and disclosed the disposal of OMIA (annual losses of c. RM30m) is on track by mid-2019. We raise FY19-20 PATAMI by 12.0% and 8.1% respectively and introduce FY20 PATAMI at RM198.4m. Maintain BUY with higher TP of RM4.00 (from RM3.55) based on 20% discount to SOP: RM5.00.

Above expectation – Reported core profit of RM42.0m, accounting for 28.5% of HLIB’s FY19 forecast and 26.9% of consensus, due to better than expected contribution from its associates Perodua and higher dealership profits. Demand for Perodua remained strong for its Myvi model (launched in Nov 2017) as well as its new Aruz SUV model (launched in Jan 2019). MBM has also recorded an exceptional gain of RM11.9m (subject to RPGT of RM0.6m) through its 70% owned subsidiary KMA Marketing for the disposal of a leasehold land and building in Sabah with carrying value of RM1.3m.

YoY: Core PATAMI improved by 28.3% due to higher group sales volume (DMSB for for Daihatsu and Hino and DMMS for Perodua) and improved sales mix (Federal Auto for discontinued loss making Mitsubishi distributorship) as well as higher contribution from associates (mainly Perodua) and JV Hirotako.

QoQ: Core PATAMI declined by -36.5%, on lower subsidiaries’ margins (higher sales and distributional costs and timing of OEM’s year end sales incentives in 4Q) and lower associates’ contributions following sales volume drop to dealers.

Outlook: MBM is expected to continue ride on stronger associate Perodua sales volume while its auto parts manufacturing benefit from increasing production volume of both Perodua and Proton. Management also disclosed that the group is on track to close the loss-making operation of OMI Alloy Wheel Manufacturing (OMIA) by mid year 2019. We understand that OMI has been dragging MBM’s with RM30m loss per annum. Hence, the complete disposal of OMI may improve MBM’s bottomline by RM30m (or 17.0% of FY21 PATAMI).

Partial disposal of Hino stakes. MBM is also disposing 22% of its 42% stakes in both Hino Motors Sales (HMS) and Hino Motors Manufacturing (HMM) for RM43.0m and RM31.4m. Based on FY18 annual report, total associates’ contribution excluding Perodua was RM16.1m (mainly by HMS and HMM), indicating the disposal of 22% stakes in both HMS and HMM are valued at FY2018 PE of c. 21.0x.

Forecast. We increase our earnings forecast for FY19 and FY20 by 12.0% and 8.1% on higher contribution from Perodua sales. We also introduced FY21 PATAMI at RM198.4m. We have not factored in the disposal of OMIA.

Maintain BUY, TP: RM4.00. Maintain BUY on MBM with higher TP: RM4.00 (from RM3.55) based 20% discount to SOP: RM5.00. MBM is currently in a net cash position with continued earnings and cash flow growth, by leveraging onto the sustaining Perodua sales. Furthermore, the disposal of OMIA will improve MBM’s earnings significantly.

Source: Hong Leong Investment Bank Research - 24 May 2019

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