MBM Resources (MBM) delivered a solid set of results - 2018 core net profit grew by 47% yoy to RM168.6, driven by: (i) higher sales from motor trading, (ii) narrowed losses from auto parts manufacturing, and (iii) higher associate and JV contribution. The strong results topped market and our 2018 estimates by circa 22%. The surprise was due to higher-than-expected associate contribution in 4Q18, as Perodua rushed to fulfill back orders for the Myvi, which had been affected by the supply disruption in 3Q18. We reiterate our BUY rating on MBM with an unchanged 12-month TP of RM3.70.

2018 Core Net Profit Grew by 47% to RM169m; Ahead of Expectations

MBM’s 2018 core net profit rose by 47% yoy to RM169m, attributable to modest revenue growth (+12% yoy), reduced losses from auto parts manufacturing and higher contribution from associates (+50% yoy). Revenue from the motor trading division grew by 13% yoy on higher car sales from the tax holiday period over June to August 2018. Elsewhere, contribution from JV and associates expanded by 50% yoy to RM194m, driven by the popular demand for Perodua vehicles, particularly the Myvi and Axia models. Lastly, MBM’s auto parts division continued to improve – attaining a lower LBT of RM12.3m in 2018 (vs. LBT of RM78.5m in 2017) on improved production efficiency at the module assembly and alloy wheel plants. Notably, MBM has systematically channeled FCF towards debt reduction, which has led to a net cash position in Dec 2018 (2017 net gearing of 0.5x).

Sequentially Stronger on Higher Associates/JV Contribution

MBM’s 4Q18 core net profit rose by 74.5% qoq to RM64.8m due to: (i) higher contribution from JV and associates (+68% qoq), and (ii) narrowed losses from the auto parts manufacturing division. The surge in associates contribution was expected as the 3Q18 performance had been dampened by the unexpected supply disruption from Perodua Myvi in Sept18. Adjusting for one-offs amounting to RM4.7m, the auto parts manufacturing division returned to the black – 4Q18 PBT of RM1.3m (vs. 3Q18 LBT of RM3.3m).

Maintain BUY With Unchanged TP of RM3.70

We expect the higher contribution from associates (Perodua) and narrowed losses at the alloy plant to sustain MBM’s 2019 earnings (high base effect in 2018 from tax holiday boost), and keep our earnings forecasts. We reiterate our BUY call and TP of RM3.70 based on an unchanged 10x 2019E PER (in line with MBM’s 3-year mean forward PER). At a 7x 2019E PER, MBM’s valuation looks attractive.

Source: Affin Hwang Research - 27 Feb 2019