MBMR achieved higher core profit in 1HFY19 at RM92.0m (+33.8% YoY), attributed by stronger dealership margins (higher sales volume and better product mix) and higher Perodua contributions (stronger sales volume). We expect MBMR to continue leveraging on Perodua’s earnings growth, with no further drag from OMIA. We have adjusted our dividend assumptions to 18- 20sen/share for FY19-21 (from 28-32sen) following clarification from management. Maintain BUY on MBMR with unchanged TP: RM4.80, based on 20% discount to SOP: RM6.00.

1HFY19 results recap. MBMR reported 2QFY19 core profit of RM50m (+19.0% QoQ; +38.8% YoY), boosting 1HFY19 core profit to RM92.0m (+33.8% YoY), which is above expectations at 55.7% of our forecast (consensus: 54.4%) due to better than expected contribution from its associate Perodua and higher dealership profits.

Perodua boosted the group’s earnings. MBMR profit was boosted by strong Perodua car sales at both its own dealership DMMS and associate Perodua, driven by strong demand for new Aruz model and high Raya May sales month. Perodua is introducing new updates for Axia model with upgraded safety specifications and 2 new variants (inclusive of a mini-SUV styled variant), which is expected to be launched in Sep 2019.

Stopped bleeding from OMIA. MBMR has ceased the operation of OMI Alloy (OMIA) in Jun 2019 and does not expect further material losses drag from the subsidiary. MBMR recognised OMIA’s loss of RM5.0m in 2QFY19 and RM7.8m in 1HFY19 as discontinued operation. MBMR is in talks with potential buyers of the business/plant/equipment & machinery and it does not expect further disposal losses given the investments in OMIA had already been impaired considerably in FY18.

Outlook. MBMR earnings are heavily leveraged on the development of Perodua, as 1) MBMR has direct Perodua dealerships (command c. 10% market share Perodua domestic sales volume); 2) MBMR’s automotive parts and components manufacturing earnings are mainly attributed to Perodua production volume; and 3) 22.6% effective stake in Perodua group. We expect Perodua sales to sustain with the upcoming launch of the updated Axia model. Nevertheless, we are relatively concerned on the potential competitive pressure from Proton, given its attractive new line-up models.

Dividend policy. Management clarified that MBMR’s newly announced 60% dividend payout policy is based on the holding company’s earnings (estimated RM80-100m p.a.) and not consolidated group earnings of RM180-200m p.a. We now project dividend payout of 18-20sen/share for FY19-21 (from 28-32sen/share), translating into dividend yield of 4.2-4.7%. MBMR dividend payout will be very much dependent on cash dividend pay up from associate Perodua after deducting holding co’s operational costs.

Forecast. We have lowered our assumptions on dividend to 18-20sen for FY19-20 from previously 28-32sen/share, following the clarification from management, but no changes to our earnings forecast.

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

Source: Hong Leong Investment Bank Research - 26 Aug 2019