Moving on from the failed takeover attempt by UMW Holdings, MBM Resources (MBM) will focus on: (i) reducing losses from its alloy wheel business and (ii) improving its financial position. In view of Perodua’s strong product line-up and positive consumer sentiment, we expect Perodua to deliver robust sales in 2019, thereby driving MBM’s associates’ earnings growth. We raise our EPS forecast by 14% for 2019-20E, and maintain our BUY with a higher target price of RM3.70 (from RM3.27). At 6x 2019E PER, MBM’s valuation is compelling.

Perodua to Drive Associate Earnings and Top-line Growth

We expect MBM’s 22.6%-owned Perodua to report stronger earnings in 2019, premised on: (i) exciting new model launches (ie. Perodua D38L SUV and likely an all-new Perodua Alza); and (ii) continued strong demand for Perodua’s existing models. Besides this associate’s contribution, MBM also benefits from the distribution of Perodua sales in Malaysia through its 51.5%-owned subsidiary, DMM Sales SB.

Narrowing Losses in Alloy Wheel Segment Should Lift Profit Margins

We anticipate OMIA, MBM’s alloy wheel unit, to remain loss-making, albeit at a smaller amount in FY19. OMIA is expected to see: (i) stable volume supplying Perodua’s alloy wheels; (ii) better production efficiency; and (iii) possible capacity take-up by Citic Dicastal (CD). The group’s current focus is on improving its operational efficiencies and minimising losses rather than its previous plan to increase production capacity to 1m units/year (from 750k/year).

Brighter TIV/TIP Outlook Bodes Well for MBM’s Top-line Growth

Apart from the Perodua cars, we believe the overall auto sales should improve in 2019, driven by: (i) new model launches; (ii) cheaper car prices; and (iii) improving consumer sentiment / spending power. The higher auto sales bode well for MBM’s motor-trading and auto-parts divisions.

Maintain BUY With a Higher TP of RM3.70

We reiterate our BUY call with a higher TP of RM3.70 based on an unchanged 10x 2019E PER (in line with MBM’s 3-year mean forward PER). MBM’s 2019-20E earnings prospects look promising, considering: (i) robust earnings contributions from associates (Perodua); (ii) modest revenue growth/higher margin mix from the motor-trading division – more Volvo premium models and Perodua SUV/MPVs; and (iii) narrowing losses from the alloy wheel segment. At 6x 2019E PER, MBM looks compelling.

Source: Affin Hwang Research - 14 Dec 2018