1Q18 CNP of RM32.8m (+69%) came in above both our/consensus expectations at 32% each due to the higher-than-expected associates’ contribution. Thus, we upgrade our FY18E/19E CNP by 5%/4%. Correspondingly, we raise our TP to RM3.30 based on the revised 11x FY19E EPS (from TP of RM2.85 based on FY18E EPS). The stock is trading at an undemanding 8.7x FY18E PER compared to 5-year Fwd. average of 11x. Reiterate OUTPERFORM.

1Q18 above expectations. 1Q18 CNP of RM32.8m (+69%) came in above both our/consensus expectations at 32% each due to higher-thanexpected associates’ contribution, especially from 22.58%-owned Perodua. No dividend was declared, as expected.

YoY, 1Q18 revenue increase by 11% due to strong contribution from the Motor segment (+8%) on higher sales volume from most of the brands within the group, especially the Perodua models which registered impressive sales volume to 55,568 units (+11%) aided by strong demand for the all-new Myvi. Meanwhile, auto parts segment sales surged 30% driven by improved production efficiency and higher demand for alloy wheels from both OEM customer and exports, as well as higher revenue from its modular assembly plant. Furthermore, PBT grew higher than revenue by 74% mainly on Associates, (+41%) especially from 22.58%- owned Perodua, and supported by higher Motor segment PBT (+17%) from favourable sales mix, and higher contribution from JV, Autoliv Hirotako (+42%) on higher production volume, and lower losses in auto parts segment (to LBT of RM3.8m from LBT of RM6.3m) on improved production levels at the alloy wheel plant.

QoQ, 1Q18 revenue increased by 4% due to strong contribution from the Motor segment (+5%) as sales from the all-new Perodua Myvi gained traction. However, this was slightly negated by the weaker performance of auto parts segments (-1%) due to the unfavourable production mix. Nevertheless, PBT was lower by 2% (excluding 4Q17 impairments) due to unfavourable sales mix, as 4Q17 saw stronger sales of premium Volvo variants.

Outlook. With the zero-rated GST starting 1st June 2018 (at average c.6% of price reduction), we expect a boost in car sales during this tax holiday transition period, while the expected introduction of the SST may increase car prices depending on the new mechanism. The Motor Trading Division will benefit from stronger margin sales from Volvo premium segment and the strong market reception of the Perodua affordable variants with its all-new Perodua Myvi which as of to-date garnered bookings of 70k, with 38k units delivered. Perodua is expected to launch the all-new Perodua SUV (D38L) in the 2H18. 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).

Upgrade FY18-19E CNP by 5-4%. We increase our FY18E and FY19E CNP by 5% and 4%, respectively to reflect the better-than-expected associates’ contribution.

We reiterate our OUTPERFORM call with a higher TP of RM3.30 based on the revised 11x FY19E EPS (from RM2.85 based on 11x FY18E EPS) which at its 5-year forward historical mean PER.

We like MBMR for; (i) its deep value stake in 22.58%-owned Perodua (based on our FY18E earnings and attached 12x PER value, MBMR’s stake is valued at c.RM908.7m), (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 - 24 May 2018