Investment Highlights

• We maintain BUY call on MBM Resources (MBMR) with an unchanged fair value (FV) of RM5.22/share. Our FV implies FY23F target PE of 8x - 1.0 standard deviation above its 5- year average of 6x. We make no changes to the neutral ESG rating of 3 stars.

• We made no changes to our forecasts as 9MFY23 core earnings of RM207mil (excluding RM29mil gain mostly from the disposal of a vacant land in Bandar Sri Sendayan, Negeri Sembilan) was within our expectation but ahead of consensus, accounting for 76% of our FY23F earnings and 81% of street’s.

• MBMR’s 9MFY23 core earnings rose 24% YoY mainly due to strong sales from 20%-owned associate Perodua, 1%-point improvement in effective tax rate and 3.6% YoY increase in group revenue, bolstered by stronger contributions from motor trading (+4% YoY) and other segments (+14% YoY). Nonetheless, the performance was partly dragged by softer sales volume for Volkswagen and Volvo with the expiry of sales tax exemptions.

• QoQ, MBMR’s 3QFY23 core earnings increased significantly by 45% to RM76mil, excluding the gain from the vacant land sale. The impressive sequential growth was largely contributed by the strong performance of associates (+54%) and joint-ventures (+15%), mainly underpinned by robust market demand.

• This was further supported by 3QFY23 revenue increasing by 15% QoQ as higher production and overall sales volume partly benefited from longer working days during the quarter under review. Auto parts manufacturing revenue increased 20% QoQ, facilitated by improvement in supplychain ecosystem with supplies of raw materials and parts now catching up with demand.

• Also, the motor trading division contributed to the overall increase in revenue by increasing 15% QoQ, attributable to higher vehicle supplies, particularly for Perodua models. Recently, Perodua has revised 2023F sales target from 314k to 325k on the back of stronger demand and better parts supply.

• We remain positive on MBMR given its high profit visibility which is reinforced by a significant order backlog of over 170k units as of October 2023 for Perodua vehicles. This backlog accounts for 52% of the carmaker's revised FY23F sales forecast and 53% of our assumption of 320k units.

• All in, we are optimistic for MBMR's near-to-medium term outlook given: 1) Perodua's strong sales; and 2) improving production levels.

• In view of the FY23F P/E of only 5x vs. its historical 5-year peak of over 9x, valuations are at a bargain. In addition to the interim distribution of 6 sen per share, MBMR also announced a special dividend of 7 sen per share. We maintain our projection of a 30 sen dividend per share for FY23F, which translates to a highly attractive yield of 9%.

Source: AmInvest Research - 27 Nov 2023