The group achieved higher profit in FY18 at RM176.3m boosted by higher associate contribution Perodua as they managed to ride on tax holiday period to record high sales in FY18. Perodua is expected to sustain its position in FY19 from its best-selling Myvi and recently launched Aruz. For its auto parts segment, it remains positive as OMIA was able to record lower loss in FY18. Management has put in plans to stop further loss recognition from OMIA in FY19. We make upward adjustment for FY19 and FY20 forecast to RM147.4m (3.6%) and RM163.4 (2.6%) to reflect better contribution from its associate Perodua. We maintain BUY on MBM with higher TP of RM3.55.

FY18 results recap. MBM reported core net profit of RM63.4m for 4Q18 (+44.4% QoQ) and RM176.3m for FY18 (+88.9% YoY), above expectation, mainly due to stronger contribution by associate due to higher Perodua sales volume in FY18 attributed to tax holiday period and lower car prices post SST implementation (vs. GST).

Perodua boosted the group’s earnings. Management shared that associate Perodua reported higher sales in FY18 by 10.6% YoY as it benefited from tax holiday period. The group was able to ride on higher contribution from associate mainly from 4Q18 following higher production of Myvi to cover backlog order. Recall that, Perodua faced supply issue with regards to the dashboard mould which affected 3.1k units for Myvi. We believe Perodua will sustain its sale volume in FY19 supported by its newly launched Aruz SUV and expected facelift Alza (Sep 2019), thus maintaining their leading position.

To stop bleeding in OMIA soonest possible. OMI Alloy has been reporting higher sales volume in FY18 (+14.3% YoY) following higher demand mainly from Perodua as they secured the manufacturing contract for Perodua Aruz. The bulk of OMI Alloy is generated from manufacturing contract to supply for Perodua vehicles and the balance would be for export in REM market. It is significant for OMI Alloy to improve their operating efficiency by improving their rejection rate. Their cost efficiency strategy brings fortune as the auto parts segment reported LBT of RM12.3m in FY18 (vs LBT of RM78.5m in FY17). Management has put in plans to stop the bleeding from OMIA within FY19, which we believe the best option is to dispose OMIA.

New models from the group. The group will introduce a few new models to excite the market in order to prep for challenging 2019. The models in the pipeline include Volkswagen Arteon, Facelift Volkwagen Passat, Volvo XC40 (CKD) and Volvo S60 (CBU). However, Volkswagen and Volvo are likely to be softer in 2019 following expectation of intense competition in 2019.

Forecast. Post analyst briefing, we tweaked our forecast upward for FY19 and FY20 to RM147.4m (+3.6%) and RM163.4 (+2.6%) to reflect better contribution from its associate Perodua.

Maintain BUY, TP: RM3.55. MBM is expected to grow from associate contribution following sustainable sales of Perodua in Malaysia. We maintain BUY on MBM with higher TP of RM3.55 (from RM3.23) based on 20% discount of RM4.43 to SOP as we carry forward the valuation into FY20.

Source: Hong Leong Investment Bank Research - 4 Mar 2019