MBM Resources (MBM) reported a stronger 1Q18 core net profit of RM32.8m (+70% yoy), slightly ahead of market and our expectations. This was on the back of higher revenue (+11% yoy) and profits from associates and joint venture entity (+41% yoy). We continue to like MBM for its steady growth in the associates segment and motor trading segment, leveraging on sustainable sales of Perodua and its key models. The stock is currently trading at an undemanding valuation of 7.6x 2019E PER. Maintain BUY with an unchanged 12-month TP of RM2.78.

1Q18 Core Net Profit Grew 70% Yoy, Tracking Above Expectations

MBM’s 1Q18 core net profit of RM32.8m (+70% yoy) was ahead of market and our expectations, accounting for 30-32% of street’s and our 2018 forecasts, due to better-than-expected contribution from associates. The stronger earnings were mainly attributable to higher revenue from motor trading segment (+8%, aided by the strong demand for the new Perodua Myvi and VW Tiguan), higher results from the associates and joint venture (+41%) as well as narrowed losses in the auto manufacturing division (on improved production efficiency and higher demand for alloy wheels). No dividends were declared during the quarter.

Sequentially, Core Pretax Profit Was 2% Lower

Sequentially, MBM’s 1Q18 core pretax profit was marginally lower at RM40.2m (-2% qoq) due to a 2% decline in associates earnings. We note that Perodua’s sales was only slightly firmer qoq at 55k units in 1Q18 vs 53k in 4Q17, and hence weaker associate contribution is likely to be due to unfavourable product mix. Elsewhere, the 1Q18 headline net profit was a strong turnaround from reported net losses of RM191.7m in 4Q17. 4Q17 headline earnings was affected by a number of EIs amounting to RM242.6m (impairments and write-downs).

Maintain BUY and TP RM2.78

We maintain our earnings forecasts, BUY recommendation and 12-month TP of RM2.78, based on an unchanged PER of 10x. At 7.6x 2019E PER, valuation is compelling in view of the: 1) steady contribution from the associates and motor trading segments and 2) a stronger Ringgit. Key risk to our positive view are lower-than-expected car sales volume and lowerthan-expected associates’ contribution.

Source: Affin Hwang Research - 24 May 2018