Post reporting a weak 1HFY20 (affected by the implementation of MCO), we now expect a strong earnings rebound in 2HFY20 due to strong demand on the implementation of SST exemptions and PENJANA stimulus plans for 15 Jun to 31 Dec. Management has guided for strong sales volume in the months of Jun and July. Due to the strong demand, Perodua has planned to increase production volume to 25k units for Aug -Dec period. Maintain BUY on MBMR with unchanged TP: RM5.00 based on unchanged 10% discount to SOP: RM5.50

1HFY20 results recap. MBMR reported a weak 1HFY20 core profit of RM22.0m (-36.1% YoY) which made up 18.0% of ours and 17.0% of consensus full year forecast. The numbers was affected by long holidays, implementation of MCO since 18 March, as well as cautious consumer sentiment. However, management is cautiously optimistic in 2HFY20 on government’s implementation of PENJANA stimulus plan and vehicle sales tax exemptions.

Sales tax exemptions. MBMR is in a strong position to leverage on the announced sales tax exemption measures from 15 Jun to 31 Dec (car delivery until 31 Jan). The group has witnessed a strong rebound in sales volume in the months of Jun and July. MBMR indicated the group has cleared majority of their inventory since mid-Jun and now working with major OEMs in boosting production volume. Perodua has announced sales volume of 21.3k units in Jun and 23.2k units in July while planned to increase productions to 25k units for Aug-Dec months.

Product launch. It has been confirmed that Perodua Kembara (Toyota Raize/Daihatsu Rocky) to be launched earliest in 1HFY21 while Proton X50 (MBMR is one the supplier to the model) is still expected to be introduced in 4QFY20. The group has recently launched the all new VW Tiguan Allspace, VW Arteon and Volvo S90 facelift.

Disposal of OMI Alloy. The monetization of OMI Alloy assets is still on track amidst some delay due to Covid-19 and MCO in place. Management is still in talks with few keen buyers of the assets and equipment, while another party has issued a letter of intent to acquire the land. The expected total proceeds is around RM50m (vs. the written down asset value of RM38.3m in MBMR’s book).

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. The group has announced 5 sen dividend payout for 1HFY20, translating into 90% payout of the reported group earnings (likely to higher than the holding company’s earnings). Hence, the 5 sen dividend signal a strong earnings and cashflow rebound in 2HFY20.

Forecast. Unchanged.

Maintain BUY, TP: RM5.00. Maintain BUY on MBMR with unchanged TP: RM5.00 based on 10% discount to SOP: RM5.50 valuation. MBMR is in good position to leverage on the implementation of tax exemptions. MBMR is currently in net cash position of RM166.8m (42.7sen/share). We assumed dividend of 16sen for FY20, 20sen for FY21 and 22sen for FY22, translating to attractive yields of 4.9%-6.8%.

Source: Hong Leong Investment Bank Research - 24 Aug 2020