MBM Resources (MBM) reported a weak set of results – 1Q20 core net profit dropped by 37% yoy to RM27.5m (-43% qoq). The weaker performance was due to weaker revenue, margin contraction and lower contributions from associates and JVs. MBM’s 1Q20 results accounted for 16-21% of street and our expectations. In view of the challenging macro outlook, we cut our earnings forecasts by 16-22% for 2020-22E. Our TP is revised lower to RM1.50, based on a target PER of 5x on 2021E EPS. Reaffirm SELL.

1Q20 Core Net Profit Declined by 37% Yoy, Within Expectation

MBM’s 1Q20 core net profit declined by 37% yoy to RM27.5m, a result of the halt of operations caused by the Covid-19 Movement Control Order (MCO) period. MBM’s 1Q20 revenue fell by 28% yoy to RM374m on reduced volume for its motor trading (-28% yoy) and auto-parts manufacturing (-41% yoy) segment; 1Q20 EBITDA margin also contracted by 1ppt to 1%. In addition, contributions from associates and JVs also fell by 35% yoy to RM31m, largely due to softer demand for Perodua cars (-26% yoy). Overall, the results only accounted for 16% and 21% of street and our full-year forecasts. On a brighter note, MBM has proposed a final dividend of 9 sen in 1Q20, bringing 2019 DPS to 22 sen (2018: 12 sen), which is still subject to shareholder’s approval.

Sequentially, Core Net Profits Slipped by 43%

Sequentially, 1Q20 core net profits were also lower by 43% qoq due to similar reasons mentioned above. We expect weaker earnings sequentially, impacted by the suspension in operations between April and mid-May 2020. Although we are relieved to know that Perodua has resumed operations, we do not expect demand to surge given the softer macro outlook and weaker consumer sentiment.

Maintain SELL With a Lower TP of RM1.50

We cut our 2020-22E earnings forecasts by 16-22% yoy after incorporating lower revenue growth and weaker associates contributions and higher operational costs from the MCO. Post our earnings adjustments, our TP is lowered to RM1.50, based on an unchanged 2021E target PER of 5x. At 11x 2020E PER, the current valuation looks stretched. Key upside risks to our call on MBM: i) higher-than-expected contribution from Perodua associates, ii) higher-than-expected car sales volume and production, and (iii) strengthening of the RM (vs. the US$).

Source: Affin Hwang Research - 22 May 2020