MBMR achieved higher core profit of RM192.9m (+10.4% YoY) in FY19, attributed to stronger dealership margins (improved product mix) and higher Perodua contributions (stronger sales volume). We expect MBMR to continue leveraging on Perodua’s earnings growth. Management guided for another round of final dividend (7-10sen/share) on top of the existing dividend of 13sen/share for FY20. We expect sustainable dividend payout of 24-26sen/share (+6.8-7.3% yield), supported by sustainable Perodua sales (net cash position) as well as disposal proceeds from OMIA. Maintain BUY on MBMR with unchanged TP: RM5.50, based on 10% discount to SOP: RM6.13.

FY19 results recap. MBMR reported FY19 core profit of RM192.9m, a growth of +10.4% YoY, driven by: 1) higher dealership sales volume (DMSB for Daihatsu and Hino, and DMMS for Perodua) and improved sales mix (Federal Auto after discontinuing loss making Mitsubishi distributorship); 2) higher contribution from associates (mainly Perodua) and JV Hirotako; and 3) lower losses from OMIA, following operational cease in mid-2019. During the year, the group also recognised disposal gains on assets (70% stake in KMA land and buildings) and investments (22% stake in Hino) for RM36.7m, partially offset by the write-off RM9.5m costs in Motor Trading segment (mainly for DMMS/DMSB).

Perodua boosted the group’s earnings. MBMR profit was boosted by strong Perodua car sales at both its own dealership DMMS (sales volume +4.9% YoY) and associate Perodua (sales volume +6.0% YoY), driven by strong demand for new Aruz model. Perodua has launched updated Axia model in Sep 2019 and Bezza facelift in Jan 2020, with upcoming attractive SUV D55L model (Kembara) in 4QFY20.

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 is in talks with potential buyers of the business/plant/equipment & machinery and hopes to conclude the exercise in 2020, potentially for cash value of RM38.3m (9.8sen/share) if based on 1x P/B valuation or more.

Outlook. MBMR earnings will continue to leverage on the sustainable sales of Perodua. Management highlighted there is no material impact due to Covid-19 towards the demand of Perodua and the supply chain of MBMR business at this juncture, as the group has enough inventory of up to 3 months. However, situation may change for the worse, should the Covid-19 outbreak not subside by May 2020. MBMR has embarked on a Transformation Program to continue improve the group’s profitability through: 1) cost rationalization and efficiency improvement; 2) tightening of KPIs; and 3) expansion of product and service offerings.

Dividend policy. Management remained firm on its 60% dividend payout policy (based on the holding company’s earnings) and guided for another round of final dividend (we expect 7-10 sen/share) on top of the first 2 interim dividends of sum 13 sen/share, providing a total of 20-23 sen/share (+6.2% yield). We expect sustainable attractive dividend payout of 24-26sen/share for FY20-21 (+6.8-7.3% yield).

Forecast. Unchanged.

Maintain BUY, TP: RM5.50. Maintain BUY on MBMR with unchanged TP: RM5.50 based on 10% discount to SOP: RM6.13 valuation. MBMR is currently in strong net cash position of RM227.7m (58.2sen/share) with continued earnings and cash flow growth, by leveraging onto the sustaining Perodua sales.

Source: Hong Leong Investment Bank Research - 9 Mar 2020