1H19 core PATAMI of RM94.8m (+20% YoY), came in above both our and consensus expectation at 56% of full-year estimates due to higher-than-expected associates’ contribution and earnings from auto-parts segment. As such, we increased our FY19-20E CNP by 11-12%. We reiterate our OP call with a higher TP of RM4.40 from RM3.45, based on higher PER of 9x on revised FY20E EPS (rolling over from 8x FY19E EPS).

1H19 above expectations. 1H19 core PATAMI of RM94.8m (+20% YoY) came in above both our/consensus expectation at 56% of full-year estimates due to higher-than-expected associates’ contribution and earnings from auto-parts segment. 1st interim DPS of 6.0 sen (1H18: 3.0 sen) was declared for the quarter, above our expectation and we revised our full-year DPS to 12.0 sen (from 6.0 sen). Note that the 1H19 core PATAMI was adjusted to exclude: (i) RM24.8m gain on disposals of 22% shareholding in its associates, Hino Motors (from 42% to 20%), and (ii) gain on disposal of assets classified held for sales of RM11.9m.

YoY, 1H19 core PATAMI rose 20% boosted by higher associates’ contribution (+23%), and improved motor vehicles trading division’s performance (higher segment margin by 1.4ppt to 2.8% from 1.4% in 1H18), as both benefited from Perodua’s sales volume of 121,743 units (+4%) buoyed by the all-new Myvi, with further boost from the all-new Perodua ARUZ. Furthermore, auto parts segment recorded higher PBT of RM6.3m (+31%) from the cessation of its loss-making alloy-wheels plant as well as from improved production efficiency. Note that, the top three selling models in 1H19 were Perodua’s Myvi, Axia and Aruz. On the other hand, volume for Volvo also increased with the addition of the XC-40 (CKD) which catered to wider market segment. However, consumer interest for Volkswagen appeared to have tapered down after the high demand enjoyed during the GST tax holiday in 2018.

QoQ, 2Q19 core PATAMI surged 34% mainly from the higher associates’ contribution, Perodua (+18%) and turnaround in its Auto Manufacturing division to record segment PBT of RM4.0m (+66%) from the cessation of its loss-making alloy-wheels plant as well as better merchandise mix with the ramp-up in sales of Perodua ARUZ which also boost its PBT margin by 3.6ppt to 16.0% from 12.4% in 1Q19 mitigating a softer motor trading (-46%).

Outlook. MBMR is our sector top pick for its: (i) its deep value stake in 22.58%-owned Perodua, (ii) dual-income streams as the largest Perodua dealer and as a parts supplier for most of the popular marques, and (iii) better earnings with the cessation of loss-making alloy wheels business. Perodua continued to record stronger sales, with a market share of 41%, premised on the higher delivery of all-new Myvi and all-new Perodua ARUZ (bookings at 25k units, 13k delivered). Perodua targeting a stronger year in 2019 with 235k unit sales (+3.5%) with reduction in waiting time for Aruz to c.1 month from c.2 months.

Increased FY19-20E CNP by 11-12%. We increased our FY19-20E CNP by 11-12% to reflect higher associate contributions and improved earnings from Auto manufacturing segment.

We reiterate our OUTPERFORM call with a higher TP of RM4.40 from RM3.45, based on higher PER of 9x on revised FY20E EPS (at 5- ye ar Fwd historical mean PER), rolling over from 8x FY19E EPS (at - 1SD). Our higher PER is premised on uncertainty removed following the cessation of loss-making alloy wheels business. Risks to our call include: (i) lower-than-expected car sales volume, and (ii) lower-thanexpected associates’ contribution.

Source: Kenanga Research - 21 Aug 2019