Investment Highlights

• We maintain BUY on MBM Resources with a slightly lower FV of RM3.09/share (from RM3.11) based on an FY19F PE of 9.0x. The small change is attributable to the removal of Mitsubishi distribution from its motor trading segment.

• Key points from the analyst briefing on Wednesday:

1) Perodua to absorb the cost of 3K deliveries in September on pre-SST bookings. The carmaker had announced a cash rebate as compensation. Additionally, Perodua sales in Sept might be lower than the average of 22K seen in the past 3 months as it would take up to mid-Sept to address a supply disruption on the dashboard mold. We expect Perodua to continue its trend of strong sales given that only 57% of the 120K in bookings for the Myvi had been fulfilled at end-August. We project 2.5%/3.0% sales growth in Perodua for FY18/19.

2) Carmakers still negotiating to have a lower SST rate of 5% rather than the 10% proposed. This would serve to minimize the drop in bookings from September. MBM guided that Perodua prices would be increased by RM2.6K-RM3.6K on a 5% SST (or up to 7.3% of Perodua’s current ASP by our estimate). Based on this, Perodua would have to shoulder at least RM7.8mil from the SST rebate in addition to the RM40mil spent on the GST rebate (offered in the last weeks of May to sustain sales that month before the zerorated GST). Given the substantial spend, MBM guided that Perodua is unlikely to engage in massive year-end sales to clear inventory during that period.

3) Perodua SUV pushed to Feb but production will begin in Oct as planned. This would mean that delayed launch would not affect suppliers such as MBM (which kept its goal of a 56% utilization for OMI by year-end) and Perodua would be launching the SUV with a sturdy reserve to avoid the issues that had plagued the Myvi. The additional time would also give Perodua a chance to finalize the pricing amid the ambiguity surrounding the SST and observe the market reception to Proton’s Boyue SUV.

4) OMI is on track to finalize its tie-up with Citic Dicastal by yearend. Recall that this would be significant for OMI as it would serve to boost volume (by ramping up REM orders to serve Citic customers in India and Europe), improve operating efficiency and position it as a partner to the world’s largest supplier of aluminum wheel and chassis components. OMI has managed to improve its yield and rejection rate from having Citic as a technical partner since 2017.

5) MBM to cease distributing for Mitsubishi from Sept. We believe this would be positive for the group considering that its sales of Mitsubishi by subsidiary Federal Auto have declined for 4 consecutive years to only 195 units in 2017 (1H18 sales were down 45% YoY to 59 units). This would also allow MBM to focus its motor trading unit on Volkswagen and Volvo, which has seen an active pipeline of launches in recent years.

Source: AmInvest Research - 30 Aug 2018