MBMR reported 2QFY19 core PATAMI of RM50.0m (+19.0% QoQ; +38.8% YoY), translated into 1HFY19 core PATAMI of RM92.0m (+33.8% YoY), above our expectation and consensus. The higher earnings were due to higher group sales volume, improved sales mix and higher contribution from associate Perodua and JV Hirotako. Declared interim dividend of 6.0sen/share (ex-date: 4 Sep 2019). The board has announced a new dividend payout policy of at least 60% of MBM’s net profit, suggesting attractive dividend of 28-32sen/share for FY19-21. We raised FY19-21 earnings by 10.2%, 8.1% and 3.3% respectively. Maintain BUY on MBMR with higher TP of RM4.80 (from RM4.00) based on 20% discount to SOP of RM6.00.

Above expectations. Reported 2QFY19 core profit of RM50m, boosting 1HFY19 core profit to RM92.0m, accounted for 55.7% of HLIB’s FY19 forecast and 54.4% of consensus, due to better than expected contribution from its associate Perodua and higher dealership profits. MBM has also recorded a gain of RM24.8m for the disposal of 22% stake in Hino Motors Sales (HMS) and Hino Motors Manufacturing (HMM) in 2QFY19 and RM11.9m (subject to RPGT of RM0.6m) through its 70% owned subsidiary KMA Marketing for the disposal of a leasehold land and building in Sabah in 1QFY19.

Dividend. Declared first interim dividend of 6.0sen/share (ex-date: 4 Sept 2019)

QoQ/YoY/YTD: Core PATAMI improved by +19.0% QoQ, +38.8% YoY and +33.8% YTD due to higher dealership sales volume (DMSB for for Daihatsu and Hino, and DMMS for Perodua) and improved sales mix (Federal Auto after discontinuing loss making Mitsubishi distributorship) as well as higher contribution from associates (mainly Perodua) and JV Hirotako.

Discontinued OMI Alloy: MBMR has ceased the operation of OMI Alloy wheel manufacturing (OMIA) by end Jun 2019, which had been dragging the group’s earning over the years. OMIA recorded a loss of RM5.0m in 2QFY19 and RM7.8m in 1HFY19.

Dividend policy: The Board has announced that MBMR has adopted a new dividend payout policy of a minimum of 60% of MBMR’s net profit. The new policy reflects the Board's intention to reward MBMR long term shareholders. We projected dividend payout of 28-32sen/share for FY19-21, translating into attractive dividend yield of 7.6- 8.6%. We note that MBM was already in net cash position of RM88.6m as at end 2QFY19, with continuous strong dividend pay up from associate Perodua.

Outlook: MBMR is expected to continue leveraging on the sustainable sales of Perodua, while its automotive components manufacturing may leverage on the sales growth of Proton. We expect 2HFY19 earnings to be relatively similar to 1HFY19 of RM92m, as the ceasing OMIA loss will be offset by the expected lower contribution from Perodua (on lower sales volume) as well as HMS and HMM (following the partial stake disposal of 22% from existing 42% stake).

Forecast. We increase our earnings forecast for FY19, FY20 and FY21 by 10.2%, 8.1% and 3.3% following higher assumptions of Perodua contribution and removing the loss drags from OMIA.

Maintain BUY, TP: RM4.80. Maintain BUY on MBMR with higher TP: RM4.80 (from RM4.00) based on 20% discount to higher SOP: RM6.00 valuation. MBMR is currently in a net cash position with continued earnings and cash flow growth, by leveraging onto the sustaining Perodua sales.

Source: Hong Leong Investment Bank Research - 21 Aug 2019