Investment Highlights

• We upgrade MBM to BUY with an FV of RM2.87 as we roll over to FY19 and with an unchanged PE of 9.5x, below its 2-year average of 12.02x. 1Q18 net profit of RM33mil exceeded expectations, accounting for 34% of our FY projection and 32% of consensus.

• Revenue was up 11% YoY and net profit surged 67% YoY. We draw the strong performance to the reception for the new Myvi, which benefited MBM via: 1) better sales for its 52%-owned DMSB and OMI, which saw sales improve 10% YoY and 34% YoY respectively; 2) a higher production rate in OMI, shrinking the pre-tax loss of the auto parts segment to RM4mil, its best showing in two years; 3) higher associate earnings (up 41% YoY) from Perodua.

• Going by segment, motor trading saw revenue improve 8% YoY while its pre-tax margin was intact at 1.3%. Auto sales across the group improved including Federal Auto, which benefited from interest in the VW Tiguan.

• Auto parts manufacturing saw losses decline on better sales to Perodua and its exports, while improving on its production efficiency. Its operating margin shrunk to a negative 4% from a range of negative 6-15% in the past two years. On a QoQ basis, the segment’s revenue and LBT held at a consistent level. We believe efforts to address operational issues and foster a better working relationship with Perodua have started to pay off.

• We raised our FY18 projection by 16% and FY19-20 projections by 3-4%. We believe MBM will continue to ride on the strength of the Myvi, for which production is set to ramp up from April to cater for an overwhelming demand for the 1.5L variants. Furthermore, Perodua could be a key beneficiary in the 3Q when the bump from the Raya promotions is coupled with a period of 0% GST.

• While momentum could appear visibly this year, we believe the volume gains for OMI could approach a steadier pace as the focus shifts to the new Perodua SUV. MBM is the sole supplier of wheels for the model, for which production will start in 4Q or early 2019. We believe the model would prioritize on margins rather than volume, which would necessary for Perodua having cornered the market of cheaper mass-market cars.

• We believe MBM will start to see better valuations as the cloud on its alloy wheel unit dissipates. Production volume in OMI is well below the 650-700K units/year it needs to see an operating profit (which management targets for FY19), but it has been on a climb for the last three years to reach 301K units in FY17.

• Given MBM’s clearer path to recovery, we believe UMW would see pressure to raise its offer price from RM2.56/MBM share closer to RM2.94 (which would imply a PB multiple of 0.8x and FY18F PE of 10.4x; vs. a PB of 0.7x and FY18F PE of 9.0x on the current offer price).

Source: AmInvest Research - 24 May 2018