1H18 CNP of RM67.4m (+89%) came in above our/consensus expectations at 63%/57%, of full-year estimates due to the higher-than-expected associates’ contribution especially from 22.58%-owned Perodua. As such, we upgrade our FY18E/FY19E CNP by 26%/14%, respectively. Reiterate OP with a higher TP of RM3.60 (from, RM3.30, previously).

1H18 above expectations. 1H18 CNP of RM67.4m (+89%) came in above our/consensus expectations at 63%/57%, of full-year estimates due to the higher-than-expected associates’ contribution, especially from 22.58%-owned Perodua. First interim DPS of 3.0 sen (1H17:1.5 sen), was declared, as expected.

YoY, 1H18 CNP surged 89% boosted by higher associates contribution (+54%) and higher motor vehicles trading division revenue (+16%), as both benefited from impressive Perodua sales volume at 117,098 units (+17%) with record-high of 41% of total industry TIV market share aided by strong demand for the all-new Perodua Myvi (currently, booking at 120k units, with 68k delivered since launches). On the other hand, auto parts segment sales (+15%) showed improved production efficiency, with higher demand for alloy wheels from both OEM customer and exports, as well as higher revenue from its modular assembly plant, resulting in lower segment losses before tax of RM7.8m compared to losses before tax of RM10.8m.

QoQ, 2Q18 CNP increased by 5% from improved contribution in associates (+5%) and Motor Vehicles segment revenue (+10%) as the all-new Perodua Myvi sales continued to gain traction, and supported by the zero-rated tax holiday from 1st June 2018, as well as pre-Hari Raya festive sales. However, this was slightly negated by the weaker performance of auto parts segments sales (-14%), with higher segment losses before tax of RM4.0m compared to losses before tax of RM3.8m in 1Q18 mainly due to OEM plant closure during the festive holiday in June as well as reduced production demand by certain car makers.

Outlook. Based on “Guide on Proposed Sales Tax Rates” prepared by Royal Malaysian Customs Department, cars will be charged 10% in sales tax, of which we expect car makers to pass down the cost to consumer. As such, we expect car prices to increase at an average of c.8%, based on back-of-the-envelope calculation as the new SST rate is the same as the old SST rate. Nonetheless, despite short-term supply disruption during the tax-holiday, all-new Perodua Myvi still maintains an impressive booking at 120k units, with 68k delivered since launches, and we expect the booking will continue to be translated into sales. Moving forward, the Motor Trading Division will benefit from stronger margin sales from Volvo premium segment and the strong market reception of the Perodua affordable variants. Perodua is expected to launch the all-new Perodua SUV (D38L) in the 4Q18.

Upgrade FY18E/FY19E CNP by 26%/14%. We upgrade our FY18E and FY19E CNP by 26% and 14%, respectively, to account for the higher associates’ contribution.

We reiterate our OUTPERFORM call with a higher TP of RM3.60 (from, TP of RM3.30, previously) based on an unchanged 10.5x FY19E EPS which is 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 profit and attached 12x PER value, MBMR’s stake at c.RM1.4b), and (ii) expected strong turn-around in the alloy-wheel division segment underpinned by the all-new MyVi and expected launch of the all-new Perodua SUV (D38L).

Risks to our call include: (i) lower-than-expected car sales volume, and (ii) lower-than-expected associates’ contribution.

Source: Kenanga Research - 29 Aug 2018