Investment Highlights

• We maintain BUY on MBM Resources but raise our FV to RM3.11/share (from RM2.87) based on a FY19F PE of 9.0x. We raised our FY18-20 projections by 9-18% to account for a better operating margin, and stronger JV & associate earnings.

• 1HFY18 core net profit of RM69mil came above expectations, meeting 63% of our projection and 59% of consensus. The figure surged 94% YoY on higher sales for both key segments, a lower loss (cut by a third) in its auto parts segment and higher associate earnings from Perodua.

• 2Q18 net profit jumped 125% YoY as the tax holiday provided a significant lift for the group’s car sales (especially in Perodua and VW), lower losses from its auto parts segment, higher JV earnings from stronger sales and forex gains in AHSB, and higher associate earnings from Perodua.

• Overall, the group was supported by higher car sales from the start of the tax holiday and improving efficiency for its alloy wheel unit. The auto parts segment saw its operating margin shrink to a negative 4.3% in 1HFY18 from 8.2% in the previous corresponding period. While it worsened slightly on a sequential basis (to a negative 4.7% in 2Q from negative 4.0% in 1Q), this was still a major leap from the negative 6-13% seen last year.

• Recall that efficiency in OMI improved as the unit lowered its rejection rate, trimmed staff by a third and reduced its orders on hold. These improvements have enabled OMI to better absorb the topline gains seen from higher deliveries to Perodua in the past three quarters.

• MBM was supported by the continuing strength of the Perodua Myvi. Perodua sales climbed 11% QoQ and 25% YoY in 2Q to its best quarterly performance ever. Recall that OMI Alloy aims to raise its utilization rate to 56% by year-end from 50% last year from deliveries to Perodua including the upcoming SUV.

• MBM said the sales growth should continue into the 3Q but cautioned that some of its OEM clients may not be able to deliver fully on their orders, given the limits from production capacity and lead time.

• The group declared a first dividend of 3 sen/share, amounting to a roughly steady payout of 17%. We remain assured in the steady approach OMI has taken to strengthen its foundation for OMI and build a better relationship with its key client.

Source: AmInvest Research - 29 Aug 2018