MBM Resources (MBM) reported a solid set of results - 1Q19 core net profit rose by 14% yoy to RM38m on better performance from the motor trading division (+6% yoy), narrowed losses from the auto parts manufacturing division as well as higher associate and JV contribution (+16% yoy). MBM’s 1Q19 results came in within market and our expectations. We maintain our earnings forecasts and roll forward our valuation base to 2020E to arrive at a higher TP of RM4.08. At a 7.5x 2019E PER, MBM’s valuation looks attractive.

1Q19 Earnings Rose by 14% Yoy

MBM’s 1Q19 core net profit rose by 14% yoy to RM38m, driven by better performance across its key segments. Excluding the gain on disposal of assets worth RM11.9m, 1Q19 PBT for motor trading division rose by 6.1% yoy on higher sales volume for Perodua (+9% yoy to 60.7k units) and Volvo (+52% yoy to 484 units). The continued demand for Perodua’s key models also translated to the 16% yoy increase in contribution of associates. Elsewhere, the autoparts manufacturing division achieved a lower LBT of RM0.4m (1Q18 LBT: RM3.8m) on further improvement in efficiency at the alloy wheel plant. The Group is on track to close the lossmaking alloy wheel plant by mid-2019, which could see the autoparts manufacturing division turning around faster than expected. All in, the 1Q19 earnings were within market and our expectations, accounting for 23-26% of our respective 2019 forecasts. No dividends were declared for the quarter.

Sequentially, Core Net Profit Was 42% Lower

Sequentially, 1Q19 core net profit was lower by 42% due to a lower EBITDA margin (-1.3ppts to 1.7% attributable to a lower-margin sales mix) and lower contribution from associates and JVs (from high base effect due to the surge in the number of deliveries following an unexpected supply disruption in 3Q18), cushioned by the narrowed losses from the autoparts manufacturing division of RM0.4m (4Q18 LBT of RM3.3m).

Realising Value in Hino

Separately, MBM has proposed to dispose of a 22% stake in Hino (from 42%) for an estimated RM74m. The proposed disposal is expected to be completed by 3Q19 and the proceeds would likely be used to pare down its borrowings of RM55m, we believe. Post-disposal, we estimate that contribution from the remaining 20% stake in Hino would contribute <5% to MBM’s bottom-line.

Reiterate BUY With Higher TP of RM4.08

We make no changes to our earnings forecasts, pending further updates on the Hino disposal and the alloy wheel plant closure. As we roll forward our valuation horizon to 2020E, we raise our 12-month TP to RM4.08 (from RM3.70) based on an unchanged 10x PER, and reaffirm our BUY rating on MBM. At a 7.5x 2019E PER, MBM’s valuation is compelling in view of the steady contribution from associates and the motor trading segment, and lower losses from the autoparts manufacturing division. Key downside risks: lower-than-expected car sales volumes and lower-than-expected associate contribution.

Source: Affin Hwang Research - 24 May 2019