MBM Resources (MBM) reported a strong set of results – 9M18-core net profit expanded twofold to RM103.8m, which was above expectations, accounting for 85% and 89% of our and street full year estimates. We maintain our BUY rating with an unchanged price target of RM3.27. We continue to like MBM for its steady contribution from associates (Perodua) and the motor trading division and reduced losses from the alloy wheel segment. At 6x 2019E PER, MBM’s valuation looks compelling.

9M18 Almost Doubled Up on Tax Holiday Boost

MBM’s 9M18-core profit grew 94.5% yoy to RM103m, driven by better performance across all its key segments, which benefitted from the zerorated goods and services tax period between June-August 2018. Notably, contribution from the associates rose commendably by 57.7% yoy to RM115m, thanks to the continued demand for Perodua key models. Elsewhere, the auto parts manufacturing division continued to show further improvement - achieving lower losses of RM9m in 9M18 (vs. RM19m in 9M17) on continuous improvement in efficiency from the increased total industry production (+10.3% yoy). This has also led to an improvement in EBITDA margins by 0.6 ppts to 1.5%.

Sequentially, Core Net Profit Grew by 9.7%

3Q18 core net profit was up 9.7% qoq, lifted by the lower losses from the auto manufacturing division of RM1.3m (vs 2Q LBT of RM4m). The unexpected supply disruption from Perodua Myvi in Sept 18 caused a negative chain impact towards 3Q18 performance. Nonetheless, we are comforted to know that the issue has been resolved and Perodua is on track to fulfil the remaining 22k backlog orders, which will benefit MBM’s 4Q18 earnings.

Reiterate BUY and Unchanged TP of RM3.27

We raise our FY18E EPS forecasts to 35.2 sen (from 31.3 sen), after incorporating the stronger 9M18 results. We maintain our BUY call with an unchanged 12-month TP of RM3.27 based on PE of 10x (in line with MBM’s 3-year mean fwd. PE). At 6x 2019E PER, MBM’s valuation is compelling in view of the: 1) steady contribution from associates and the motor trading segment, and 2) lower losses from the alloy wheel business. Key downside risks: lower-than-expected car sales volume and lower-thanexpected associates’ contribution.

Source: Affin Hwang Research - 23 Nov 2018