We came away from MBMR’s 4Q17 results briefing feeling optimistic with its proactive action taken to strengthen the Group’s position. Maintain OP with unchanged TP of RM2.85. The stock is trading at an undemanding 8.8x FY18E PER compared to 5-year forward average of 11x.

Further details on FY17 results. FY17 revenue increased by 4% with better sales seen across all segments. Motor vehicles trading registered higher sales (+3%, commanding c.90% of total revenue), mainly due to the higher sales volume contribution from Federal Auto- continental makes (+20%), and mitigated by the lower sales volume in DMSB- Daihatsu & Hino trucks (-11%), and DMMS- Perodua (-1%). Overall, the group service throughput was higher by 2% to 190,775 units. Meanwhile, Auto parts manufacturing segment (accounting for c.10% of total revenue) registered higher FY17 sales (+7%) underpinned by higher demand for alloy wheels (+40% in sales volume) by its major customer, Perodua. Correspondingly PBT was higher by 14%, mainly on higher contribution from 51%-owned Autoliv Hirotako (to RM41.0m in FY17 from RM11.7m in FY16) from the higher sales of seatbelts. Kitchen sinking exercises are expected to be minimal in the future with the huge impairment in FY17 totalled at RM242.6m which saw its goodwill trimmed to a mere RM1.1m.

New launches in FY18 to excite the market. For FY18, Motor trading division is expected to be boosted by new attractive models launching namely all-new Volvo XC60 CBU (Jan 2018), Volvo XC60 CKD (April 2018), Volvo XC40 (CBU), Perodua SUV (D38L), Daihatsu Granmax, Volkswagen Arteon, Mitshubishi Xpander (MPV), and Volkswagen Golf (MK7.5). On the other hand, the all-new Perodua MyVi which saw higherthan-expected demand for its premium models (actual ratio at premium:standard of 80:20 from targeted 50:50), is expected to gain traction and to register higher sales volume in FY18. Subsequently, the group is expected to open several dealerships and service centres to cater for the growing demand from Perodua and as a part of its strategies to grow after-sales service revenue while closing underperforming outlets.

Auto parts manufacturing division to break even in FY19. With alloy wheel production seeing a huge jump to 301k units (+40%) in FY17, we gather that, at the current pace, breakeven could only be seen in FY19 (with 550k units produced). For FY18, we believe the sales volume for alloy wheel to be at least c.420k units or 56% capacity utilisation (maximum capacity at 750k units) mainly on orders from Perodua supported by the allnew Perodua Myvi, expected launch of the all-new Perodua SUV (D38L) and the export market. 51%-owned Autoliv Hirotako has also benefitted from the all-new Perodua MyVi growing volume which entails much higher airbags content (4-6 airbags per car).

Outlook. Perodua’s actual sales in 2017 came in at 204.9k units exceeding initial target of 202k units, and subsequently aiming higher for 2018 at 209k units with expected volume boost from the all-new Perodua Myvi and with introduction of the all-new Perodua SUV (D38L). The Motor Trading Division will benefit from the strong market reception of the Perodua affordable variants and stronger sales from Volvo premium segment. The Auto parts manufacturing division is estimated to break even in FY19 with its alloy wheels plant expected to produce at least c.73% of the maximum capacity (maximum capacity at 750k units).

Maintain OUTPERFORM with unchanged TP of RM2.85 based on 11x FY18E EPS which at its 5-year mean Fwd. PER. The stock is trading at an undemanding 8.8x FY18E PER compared to 5-year forward average of 11x. We like MBMR for; (i) its deep value stake in 23.6%-owned Perodua (based on our FY18 profit forecast and attached 10x PER value, MBM’s stake at c.RM1.1b which is 23% higher than MBMR current market capitalisation), (ii) expected strong turnaround in the alloy-wheel division segment underpinned by the all-new Perodua variants, and (iii) a stronger MYR. Risks to our call include: (i) lower-than-expected car sales volume, and (ii) lower-than-expected associates’ contribution.

Source: Kenanga Research - 26 Feb 2018