Investment Highlights

• We maintain BUY on MBM Resources but raise our FV to RM3.42/share (from RM3.09) based on an unchanged FY19F PE of 9.0x. We raised FY18-20 net profit projections by 11-13% on higher operating margins and improving efficiency in OMI.

• MBM’s 9MFY18 core net profit of RM109mil exceeded expectations, accounting for 86% of our and 89% of consensus forecast.

• The YTD result was up 98% YoY on three key factors: 1) higher total car sales, propelled not only by the Perodua Myvi but a rebound for DMSB (Daihatsu & Hino) and Federal Auto (Volvo & VW) after seeing two consecutive annual declines to 2017; 2) losses from auto parts manufacturing segment halved YoY due to higher deliveries to Perodua and better efficiency; 3) stronger associate earnings from Perodua on the Myvi.

• The key positive surprise in 3Q was the stronger improvement in its auto parts manufacturing segment. This segment cut its pre-tax loss substantially without reaping a much higher topline, reflecting much greater efficiency. Pre-tax loss shrank 132% QoQ despite topline improving only 3% QoQ, the latter owing to a supply disruption in Perodua (OMI production fell 1% QoQ while Perodua’s production fell 2% QoQ).

• This reflects the results of the ongoing work to address the fundamental problems in OMI. Recall that the unit had cut its rejection rate (to 15% from 40% in early 2017), trimmed its staff by a third and reduced the number of orders on hold.

• Apart from this, 3Q enjoyed two months of the tax holiday but Perodua’s supply was insufficient in meeting the spike in demand. This was worsened by the supply disruption in Sep. Both earnings from MBM’s associates line and motor trading segment were sequentially flat as a result. Perodua seemed to have contained the impact of slightly lower sales in 3Q, while the same issue for MBM’s motor trading segment was neutralized with higher sales by DMSB and FA.

• On a YTD basis, the Perodua Myvi served to boost earnings in all key areas for MBM. The big change to note was the declining losses from auto parts manufacturing as a result of OMI’s reforms.

• MBM is now in a more formidable place to take on its planned tie-up with Citic Dicastal, which would serve to boost volume, improve operating efficiency and position it as a partner to the world’s largest supplier of aluminum wheel and chassis components.

• We believe this contract — initially eyed for the year-end — would serve as a major catalyst as it could see OMI going back to the drawing board to factor bigger ambitions and earlier breakeven targets.

Source: AmInvest Research - 23 Nov 2018