Investment Highlights

• We maintain BUY on MBM Resources with a slightly higher FV of RM3.48 (from RM3.42/share) pegged to an FY19F PE of 9.0x. Our FY19–20 projections are tweaked up by 2–3% to account for better margins in MBM’s core segments while retaining our projections for Perodua’s volume growth.

• FY18 core net profit of RM173mil exceeded expectations, accounting for 120% of our FY projection and 125% of consensus. This stemmed from a slight improvement in gross margins (by 0.6ppt), a cut in administrative expenses (slashed by 42% YoY) and a stronger-than-expected contribution from Perodua in 4Q (associate earnings rose 40% YoY to RM65mil, forming 88% of MBM’s PBT that quarter).

• Perodua’s production spiked to 63K units in 4Q to compensate for the downtime in the previous quarter, kick-start production of the Aruz SUV and prepare for demand from the festive period ahead. This benefited MBM by way of higher sales for its motor trading segment and higher associate earnings.

• The motor trading segment leaned on Perodua to weather lower sales by Federal Auto during 4Q. Federal Auto brands had seen tremendous growth in the previous two quarters and during the tax holiday period, with strong demand for the Volvo XC-90 and Volkswagen Tiguan especially. We note that Federal Auto sales still saw a healthy 15% YoY growth in sales for FY18, actually exceeding the 7% YoY growth seen by DMSS from the sales of Perodua vehicles.

• Apart from this, higher deliveries to Perodua and an improvement in production efficiency saw the auto parts manufacturing segment register a core PBT of RM1.3mil in 4QFY18 (vs. a core LBT of RM2.7mil in 4QFY17). MBM has made vast progress in this segment as it managed to retain a healthy topline in every quarter this year and significantly reduce losses on a YoY basis.

• MBM’s FY18 result (core net profit up 63% YoY) benefited from a culmination of these 3 key factors: 1) Perodua’s strong performance (FY18 production up 29% YoY, sales up 11% YoY) boosted MBM by way of stronger associate earnings, as well as better business for its two core segments; 2) A significant improvement in OMI Alloy which is now able to retain business from its key consumers and even ended the year with a profitable 4Q; 3) Stronger performance by its motor trading segment which counted on both Perodua and Federal Auto to see higher sales (up 12% YoY) and a stronger margin (1.6% vs. 0.7%).

• MBM declared a second and final dividend of 3.0 sen/share, taking the total for FY18 to 6.0 sen/share resulting in a payout of 14% of its core net profit (vs. 3.0 sen/share and 11% in FY17). Yields are fair at 2.2–2.7% based on a forward payout assumption of 15%.

Source: AmInvest Research - 28 Feb 2019