• MBM Resources (MBM) reported a weak set of results – 6M20 core net profit fell by 77% yoy to RM22m, largely due to the severe impact of the MCO.
• Nonetheless, the 6M20 results are within expectation, as we anticipate the sales volume of 22.6%-owned Perodua to rebound on a sales tax exemption.
• Maintain HOLD with a lower TP of RM3.20 based on 10x 2021E EPS. At a 10x 2021E PER, the valuation looks fair.

Thrust Into the Red in 2Q20 Due to MCO

The halt in business operations during the Movement Control Order (MCO) was the main culprit behind MBM’s core net loss of RM5m in 2Q20 (vs. core net profit of RM28m in 1Q20). Notably, MBM’s 2Q20 revenue fell by 31% qoq to RM259m, its lowest quarterly revenue since 1Q09 (RM253m). The 2Q20 combined contribution from associates and Autolive JV was a negative RM5m for the first time on record. Recall that 20%-owned Hino and 22.6%-owned Perodua contributed 71% of MBM’s 2019 PBT. On a positive note, its 2Q20 EBITDA margin was marginally better by 1.1ppt qoq to 2%, thanks to the implementation of cost-reduction measures.

6M20 Core Net Profit Fell by 77% Yoy, But Within Expectation

MBM’s 6M20 core net profit plunged by 77% yoy to RM22m, as operations were severely impacted by the MCO. Although it comprised 17% and 20% of the street’s and our full-year estimates, the results are within expectation as cheaper car prices from the sales and service tax exemption are likely to jumpstart car sales in 2H20. New Straits Times reported that Perodua’s July20 sales volume rebounded by 9% yoy to 23k units, bringing Perodua’s 7M20 sales volume to 97k units (-40% yoy) and firmly placing Perodua in the market leader position, with a 7M20 market share of 42% (vs. 7M19 market share of 41%). MBM declared a 5-sen interim dividend for 2Q20 (2Q19: 6-sen).

Maintain Hold With a Lower TP of RM3.20

We keep our earnings estimates unchanged, pending further updates from the upcoming results briefing. We lower MBM’s TP to RM3.20 (from RM3.60) based on a 10x 2021E EPS (from 11x; +0.5SD MBM’s 5-year mean of 8x). We believe a premium is warranted for MBM, given it’s a proxy of Perodua’s sales recovery (via its 22.6% stake in Perodua, Perodua dealership and parts manufacturing units). At a 10x 2021E PER, we think the negatives are largely priced in. Reaffirm HOLD. Key upside/downside risks: i) higher/lower-than-expected contribution from Perodua associates, ii) higher/lower-than-expected car sales volume and production, and iii) supply chain disruption to the autoparts division

Source: Affin Hwang Research - 21 Aug 2020