We expect to see sales from motor trading segment as well as associate, Perodua and Hino to climb up during Jun – Aug 2018 from the zerorisation of GST. Outlook for its auto parts segment remains positive as OMI Alloy is on track to achieve its target of breakeven by year end. Our forecast is unchanged, and we maintain BUY with unchanged TP of RM3.04.

Benefit from zerorisation of GST. Since the implementation of the zero-rated GST on 1 June, positive momentum has been seen in domestic car sales volume. In view of SST implementation, MBMR is in talks to reduce the SST cost to 5% instead of 10%. Their analysis mentioned that 5% SST will increase Perodua’s sales price approximately by RM2.6k to RM3.6k. We expect a better 3Q, as sales volume should ramp up due to the zerorisation of GST, which will benefit sales volume of both automotive (distributorship and dealership) and automotive parts and components

No Mitsubishi sales going forward. Management plans to terminate the dealership of Mitsubishi vehicles from Sep 2018 given the disappointing sales from the marque. To recap, MBMR previously closed a few of its dealership branch due to high operating cost. We believe this would be beneficial to the group as Mitsubishi sales has dropped to 59 units in 1H18 (-44.9% YoY).

Strong associates contribution. Management mentioned that higher associates contribution was due to higher sales volume in 1H18 from strong demand for Perodua, further boosted by GST rebate program in May and GST zerorisation in Jun. Noted that, Perodua offered GST rebate ahead of the tax holiday period which costed them approximately RM40m. Recently Perodua announced that they will compensate customers in terms of cash rebate for the 3.1k units which will be affected by the supply issue of the dashboard mould. Following the high cost incurred for GST rebate program and cash rebate, management mentioned that Perodua is not looking forward for aggressive year-end sales this year. Management shared that the anticipated Perodua SUV launch will be postponed to Feb 2019. However, the current Alza model will be phased out to make way for a new facelift model in September.

OMI Alloy wheel to breakeven in FY19. OMI Alloy is expected to see better volume as it starts to deliver new supply programmes and move towards better production efficiency through various cost-cutting measures and process enhancement. Given the large increase in volume expected from the partnership with Citic Dicastal, we are convinced that the alloy wheel plant is on track to breakeven in FY19 underpinned by increased volume from Perodua, aggressive supply to the export REM market and partnership with Citic Dicastal. OMI Alloy maintained its production utilization target of 56% in order to break even by year end.

Forecast. Our forecast remains relatively unchanged despite removing Mitsubishi dealership given the small contribution.

Maintain BUY, TP: RM3.04. MBMR is expected to leverage on sustainable sales of Perodua in Malaysia (as well as opportunity for export market). Furthermore, OMI has started to show positive signs of turnaround in 1H18. We maintain BUY on MBMR with unchanged TP of RM3.04 based on 20% discount to SOP.

Source: Hong Leong Investment Bank Research - 30 Aug 2018