MBMR recorded a disappointing 1QFY20 of RM27.1m (-42.6% QoQ; -34.5% YoY) and expects a worsening 2QFY20, affected by the implementation of MCO. Management has implemented cost savings measures and transformation plans to position the group for the “new normal”. We reckon MBMR is in a strong position to take advantage of government’s implementation of sales tax exemption from 15 Jun to 31 Dec. Maintain BUY on MBMR with higher TP: RM5.00 (from RM4.50), based on lower 10% discount (from 15%) to SOP: RM5.50.

1QFY20 results recap. MBMR reported a disappointing 1QFY20 core profit of RM27.1m (-42.6% QoQ, -34.5% YoY) which made up 18.0% of ours and 15.3% of consensus full year forecast. The results shortfall was affected by long holidays, implementation of MCO since 18 March, as well as cautious consumer sentiment. Management guided that walk-in customers remained almost nil post implementation of MCO.

Strategic measures. Management expects market condition to remain highly uncertain and challenging for the remaining 2020 due to Covid-19 and deteriorating consumer sentiment. Management is tightening operating costs and capex spending in order to reserve cash and to meet liquidity requirements. The group is also accelerating its Transformation Plan in order to improve efficiency, performance and diversify product/service offerings. New marketing platforms are also being invested in order to capture the changing behaviour of consumerism.

Product launch. While there is no update on the launching of highly anticipated Proton X50 and Perodua Kembara (Toyota Raize/Daihatsu Rocky) in 2H20, management anticipates a potential slight delay on these launches. The group is expecting to launch all new VW Tiguan Allspace and Volvo S90 facelift in 2H20.

Outlook. On a brighter side, the government has announced tax incentives for new passenger car purchases from 15 Jun to 31 Dec 2020, to stimulate the automotive sector and provide financial relief to car buyers, as part of the short term economic recovery plan. There will be full sales tax exemption for CKD models and 50% sales tax exemption for CBU models. These measures are likely to boost overall automotive sales in 2H20, as many consumers may take the opportunity to buy cars at a lower price within this short-term window.

Dividend policy. Management remained committed on its 60% dividend payout policy, based on the holding company’s earnings which include dividend received from JV Hirotako; and associates Perodua and Hino group. We believe that both Hirotako and Perodua were in net cash position by end 2019 and expect both entities to able to take advantage of the government’s measure on tax incentives in 2H20.

Forecast. We raised our forecast by 5.6% for FY20 and 1.9% for FY21 and FY22, after imputing higher sales volume in anticipating stronger sales with the recent implementation of tax incentives by the government.

Maintain BUY, TP: RM5.00. Maintain BUY on MBMR with higher TP: RM5.00 based on lower discount 10% (from 15%) to SOP: RM5.50 valuation. MBMR is in good position to leverage on the implementation of tax incentives. MBMR is currently in net cash position of RM189.0m (48.3sen/share). We assumed dividend of 16sen for FY20, 20sen for FY21 and 22sen for FY22, translating to attractive yields of 4.7%- 6.4%.

Source: Hong Leong Investment Bank Research - 9 Jun 2020