Investment Highlights

• We maintain our BUY call on MBM Resources (MBMR) with a higher FV of RM3.59 (from RM3.18 previously) as we roll over our valuations to FY21F, pegging the stock to a PE of 7x.

• We cut our FY20F net profit forecast by 27% to account for lower sales volume assumptions due to: i) the prolonged movement control order (MCO); and ii) weaker market demand as consumer demand for big-ticket items is unlikely to recover to pre-Covid-19 levels in the near term. No changes to our FY21–22F estimates.

• We deem MBMR’s 1Q20 core net profit of RM27.3mil to be below both our and consensus estimates, accounting for 15% of ours and consensus forecasts. MBMR’s core net profit was down by 33% YoY compared to 1Q19’s RM40.9mil.

• MBMR registered a lower 1Q20 revenue of RM374.0mil (-28% YoY) largely due to a slide in its motor trading division’s sales volume (-28% YoY). Perodua sold a total of 45.0K units in 1Q20 vs. 60.7K units in 1Q19 (-26% YoY). We also witnessed a drop in sales volume of Daihatsu & Hino trucks (-9.7% YoY). Federal Auto’s sales volume also disappointed, falling by 30.8% YoY. Due to the implementation of the MCO, both Volvo and Volkswagen recorded 1Q20 depressed sales volumes of 0.4K units (-15% YoY) and 0.8K units (-42% YoY) respectively. MBMR’s motor trading division posted a lower 1Q20 PBT of RM1.1mil (-80% YoY) compared to 1Q19’s RM5.5mil.

• MBMR’s auto parts manufacturing division also recorded a lower revenue of RM37.6mil (-26% YoY) in 1Q20. With that, the division’s PBT tumbled 59% YoY to RM1.0mil from RM2.4mil in 1Q20. We also noticed a decreased earnings contribution from Hirotako Acoustics (HASB) and Oriental Metal Industries (OMI) with a relatively lower sales revenue of 28.4% and 25.4% YoY respectively.

• Earnings contribution from MBMR’s associate was also weaker with a PBT of RM28.3mil (-34% YoY) in 1Q20 compared to RM42.8mil in 1Q19. We reckon this was due to Perodua’s lower earnings contribution as sales volume shrank due to the MCO. We note that the group’s associate earnings contributed 91% of MBMR’s PBT for 1Q20.

• Nevertheless, MBMR’s balance sheet remains strong with a net cash position of RM189.0mil as of 1Q20. This will help it weather the headwinds in these uncertain times of a global pandemic and lower consumer demand for big-ticket items.

• We expect MBM’s earnings to improve in 2H20 as dealers and showrooms are now allowed to open for business, compared to zero sales for about 2 months in 1H20. Our BUY call is also premised on the belief that Perodua cars should recover more quickly compared to other brands because of its more attractive pricings for its model line-ups and value propositions.

Source: AmInvest Research - 22 May 2020