• We exercise caution regarding MBMR's outlook. This consideration is due to potential challenges stemming from the conclusion of the SST exemption, reduced backlog orders, TIV normalization, an 8% SST increase, and the introduction of the RON95 subsidy.

• We acknowledge the news of the temporary suspension of Daihatsu's shipments, which has generated concerns for Perodua. Nonetheless, it is noteworthy that the anticipated impact on Perodua is minimal, given the current localization of a significant portion of its components.

• In view of the challenging business outlook, we downgrade the stock to a HOLD call with new TP of RM4.28 (versus RM4.70 previously). Our valuation is pegged at 6.6x PER (+0.5 STD above 5-year mean PER) to FY24F EPS of 64.4sen.

Perodua Production Ramp-Up

As of November 2023, Malaysian Total Industry Volume (TIV) reported 71,906 units. Cumulatively for the first 11 months of 2023, it reached 718,747 units, showing a strong likelihood of surpassing the 2022 record of 720k. This positive trend aligns with MBMR's overall vehicle sales, particularly those from Perodua, which experienced a remarkable +19% YoY surge. As of 10M 2023, Perodua recorded a total production of 280,452 units, compared to 229,811 units during the corresponding period in 2022. The significant increase in production is attributed to the higher speed of the assembly lines and improvements in the supply chain. While the TIV figures remain robust, there is a possibility that demand has peaked, potentially leading to a decline in sales. This could be attributed to several factors i.e., i) the conclusion of the SST exemption in March 2023, ii) a reduction in backlog orders for Perodua vehicles (140k for Dec 2023 compared to 200k in Dec 2022), iii) the expected normalization of TIV after two strong years, iv) an increase in SST to 8%, and v) the introduction of a targeted subsidy program for RON95. In conclusion, despite noteworthy advancements in MBM's auto part manufacturing and commendable efforts by Perodua to streamline delivery times, the current landscape reveals a lack of critical catalysts to stimulate demand in MBM's vehicle sales.

Daihatsu to Suspend Shipments, Including Perodua

The news of Daihatsu Motor temporarily halting vehicle shipments is causing concerns, particularly for Perodua, which relies on Daihatsu for crucial parts. Despite this, guidance from management suggests that the impact on Perodua will be minor. They have highlighted that 95% of the parts they use come from local suppliers, reducing their

dependence on Daihatsu. Therefore, even though some issues may arise, Perodua is actively taking steps to manage the situation and ensure smooth operations. As such, there is no change in our earnings forecast at this juncture.

Downgrade to HOLD with changed TP of RM4.28

We are downgrading our recommendation to HOLD from BUY, with a new target price (TP) of RM4.28 (previously RM4.70). Our valuation is pegged at +0.5 standard deviations above the 5- year mean PER of 6.6x to FY24F EPS of 64.4sen. This revision is to account for our reassessment of potential downside risks to MBMR's earnings, attributed to challenges stemming from the conclusion of the SST exemption, reduced backlog orders, TIV normalization, an 8% SST increase, and the introduction of the RON95 subsidy. Despite the downgrade, we still recommend investors to hold the stock, considering its attractive 9% dividend yield.

Source: BIMB Securities Research - 22 Dec 2023