Investment Highlights

• We maintain our BUY call on MBM Resources (MBMR) but raise our FV to RM5.54/share (from RM4.05/share previously) based on a higher P/E multiple of 11x (from 9x previously). This is to justify: i) MBMR’s position as a proxy to Perodua as it protracts its position as the leader of market share in the local automotive space; and ii) better certainty and earnings visibility for the group.

• We increase our FY19/20/21 core net profit forecasts by 12%/12%/11%. This is to account for higher associate earnings assumption from Perodua due to i) the reduced waiting time for the delivery of Aruz on an improved supply chain for the most popular SUV; and ii) higher sales volume assumption from 230.6K to 238.1K on the back of a refined delivery process and new Perodua launches.

• Our key takeaways from MBMR’s analyst briefing:

1) The group said that it will adopt a dividend payout policy of 60% on company level. Based on our estimates, this translated into a DPS of 20 sen and decent dividend yield of 4.7% for FY19–20. MBMR reiterated that a second interim dividend and a final dividend will be announced along with their 4Q19 results.

2) OMI Alloy plant to be sold. After the recent cessation of the alloy business, the group is now looking to sell its plant and machineries. Management guided that a loss on its disposal will be unlikely given that its current net asset value has been written down to a very low level of RM30.3mil compared with its market value. Also, a total of RM62mil has already been impaired for the factory in FY16 and FY17.

3) New Axia crossover and Bezza. An all-new Axia crossover will be introduced in September and there will be a facelift of the Bezza at the end of the year (tentative). At 7M19, Perodua has a total sales volume of 141.7K units, which is well in line with our full-year updated estimates of 238.1K at 59.5%. We are also excited for further clarity on the 5-seater SUV which will be launched in 2H2020, which is said to be a smaller version of the current Perodua Aruz.

4) Growth plans. According to MBMR, it is looking to expand its foothold in the after-sales business by improving their service quality and efficiency. This is because the nature of the business provides better profit margins compared with the vehicle distribution business. However, no further details were available.

• Despite the recent share price rally for MBMR, we think that the stock still has a tremendous underlying value which has yet to be priced in. We believe that MBMR will continue to shine as a proxy to Perodua as it protracts its position as the leader of market share in the local automotive space. We are excited about the group’s future plans to expand either organically or via more JVs with established names to further build on its distribution and auto parts business.

Source: AmInvest Research - 26 Aug 2019