MBM Resources - Shifting Into Gear

Date: 24/05/2019

Source  :  MIDF
Stock  :  MBMR       Price Target  :  4.20      |      Price Call  :  BUY
        Last Price  :  4.00      |      Upside/Downside  :  +0.20 (5.00%)


  • 1Q19 matched expectations
  • Strong earnings driven by Perodua, spillover benefits for dealership and auto parts
  • On track to close loss-making alloy wheel operations
  • Re-affirm BUY at unchanged TP of RM4.20

1Q19 matched expectations. MBM’s 1Q19 came in within our estimates and consensus. The group reported core net profit of RM41m (+25%yoy) for its 1Q19, accounting for 22% of our FY19F and 26% of consensus.

Strong demand for Perodua. Associate earnings comprising mainly of 22.6%-owned Perodua, increased 16%yoy driven by the Aruz and existing MyVi and Axia models. JCE earnings (via 51%-owned AutolivHirotako which produces automotive safety components such as airbags and seatbelts) also saw earnings increase by a similar quantum.

Spillover beneficiary of strong Perodua sales. The auto dealership division saw core pretax earnings growth of 6%yoy (excluding RM11.9m gain on disposal of properties) as the group’s Perodua dealerships benefited from strong demand for the Aruz, MyVi and Axia. Via 51.5%- owned DMMS, the group is the largest Perodua dealership in the country with ~10% share of sales. Its Volvo dealership also saw improved demand following launch of the XC40.

Auto parts division almost breaking even. The auto parts division saw a 3%yoy increase in revenue and is now almost breaking even. This was driven by sustained strong demand as industry players rush to fulfil back orders and replenish depleted stocks following a strong 2H18. The lower losses were also driven by further improvements at the alloy wheel plant.

On track to eliminate OMIA drag. More importantly, MBM is on track to close operations of the alloy wheel plant (under OMIA) by mid-2019. This will remove an important drag to the auto parts division. OMIA registered net losses of RM38m/RM29m in FY16/17. OMIA as a standalone company is estimated to entail negative shareholders fund of RM179m as at end-FY17 (inclusive of the RM62m impairment taken) against total liabilities of RM224m and total asset of RM45m.

Reaffirm BUY on MBM at unchanged TP of RM4.20. At just 6x FY19F earnings, MBM remains a cheap proxy to Perodua’s volume expansion and the spillover on its parts manufacturing and Perodua dealership units. Key catalysts: (1) Strong 6%yoy Perodua TIV expansion (FY19F) on the back of the Aruz to fill up a vacum in Perodua’s model mix (2) A recovery in industry production driven by the new national car launches. Risk to our call is weaker than expected demand for the Aruz and a weak Ringgit.

Source: MIDF Research - 24 May 2019

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