MBM Resources (MBM) delivered a strong set of results – 6M19 core net profit rose by 18% to RM95m, driven by better performance from the motor trading division (+28% yoy), (ii) cessation of the legacy alloy manufacturing losses and (iii) higher associates and JV contribution. The strong results came in within street but was above our expectations. We raise our EPS by 9%-18% for 2019-21E, and maintain our BUY with a higher TP of RM4.55 (from 4.08). At 8x 2020E PER/8% yield, MBM’s valuation is attractive.

6M19 Results Grew by 18% Yoy; Ahead of Expectation

MBM’s 6M19 headline profit grew by 84% yoy to RM124m, driven by (i) higher contribution from motor trading division (+28% yoy), (ii) turnaround of auto parts manufacturing division (6M19 PBT: RM3.5m; losses from alloy wheel plant has been reclassified as discontinued operation), (iii) higher contribution from associates and JVs (+19% yoy) and (iv) RM24.8m disposal gain of 22%-stake in Hino. Stripping off the EIs, MBM’s 6M19 core net profit would have expanded by 18% yoy to RM95m. Overall, the results was within street but was ahead of our expectations, achieving 54% and 63% of our respective forecasts. The surprise was due to the higher-than-expected contribution in MBM’s auto-parts manufacturing division and higher-thanexpected associate contribution in 6M19.

2Q19 Earnings Up 44% Qoq; Declares DPS of 6 Sen

Similarly, MBM’s 2Q19 core net profit was sequentially higher by 44% due to the above-mentioned factors. Elsewhere, MBM also announced that it would adopt a dividend payout policy of minimum 60% of Group’s net profit, which is above its 5-year historical average payout at 25%. In tandem, MBM declared a 6-sen interim dividend for 2Q19 (2Q18: 3 sen).

Plans to Dispose Loss-making Alloy Rim Business, OMIA

MBM’s unit, OM Alloy (M) SB (OMIA) ceased its alloy wheel plant’s operations since mid-19. The cessation of alloy wheel plant should relieve MBM from the earnings drag, gradually turning around MBM’s auto-parts manufacturing arm. Recall, OMIA has been loss-making since it began operations in 2012 due to insufficient volumes, high rejection rates, low selling price and rising material prices. It was reported that that MBM is keen to dispose the loss-making venture and has identified numerous potential buyers. We gather that the proceeds will be used to pare down the outstanding borrowing of the alloy wheel business.

Maintain BUY With Higher TP of RM4.55

We raise our 2019-21E EPS by 9%-18%, to reflect (i) higher contribution from auto-parts manufacturing division, (ii) higher contribution from associates and (iii) and lower interest costs. We also raise our dividend assumption to 27-29sen (from 6sen) in 2019-21E EPS based on the new dividend payout policy. In tandem with our earnings upgrade, we raise our TP to RM4.55 (from RM4.08) based on unchanged 10x PER and reaffirm our BUY rating on MBM. At 8x 2020E PER/8% yield, valuations look attractive. Key downside risks: lower-than-expected car sales volume, possible write-down/closure cost for the alloy wheel business and lowerthan- expected associates’ contribution.

Source: Affin Hwang Research - 21 Aug 2019