1H19 results briefing was presented by Ms Annie Chin (CFO) and well attended by c.40 analysts/fund managers. Despite the keenly awaited launch of the 2019 face-lifted Axia in early-Sep to meet its year-end sales target of 235k units, the best of earnings growth appears to be in the rear-view mirror. With a 2- year CAGR of merely 7.7%, on a 1-year Fwd. PER of 9x, we rate this stock as Fairly Valued and having risen an impressive 93% YTD, we believe the positives are priced in at the current level. As such, we downgrade it to MP from OP with a TP of RM4.40.

1H19 results were excellent. 1H19 core PATAMI rose to RM94.8m (+20%) boosted by higher associates’ contribution (+23%), and improved motor vehicles trading division’s performance, 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 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. MBMR is still negotiating with the potential buyer for its alloywheels plant (under Oriental Metal Industries (M) S/B) in which it initially invested RM103m. The plant value has since been impaired down to RM46.7m as at 31 Dec 2017. MBMR is expected to record one-off gain from this plant disposal and have separately recognized OMI contribution under discontinued business. MBMR also guided that the growing aftersales throughput (+3.5% YoY) is one of the drivers for the improved Automotive segment margin (+1.4ppt) and will continue to improve this segment with service center renovations and improved customer service.

2019 face-lifted Perodua Axia to lift 2H19 sales. 2019 face-lifted Axia (SUV-inspired looks with updated technological variants, i.e. ASA 2.0 and a touchscreen head unit with reverse camera) is now open for pre-launch booking ahead of early-September launch and to be priced at RM24k to RM43k. Axia is the number one volume contributor to Perodua, contributing c.40% of total Perodua sales based on c.49k units sold in 1H19 of total 121,743 units (+4%). Other the hand, other new models from MBMR dealerships stable would be Volkswagen Arteon, Volkswagen Passat (facelift), Volvo V60 (CBU) and Volvo S60 (CBU).

Dividend policy at 60% of holding company. MBMR is an investment holding company which income dependent on the dividend received from its subsidiaries and associates. Given the large earnings contribution from associates and Perodua, the dividend policy would be based on the holding company level income. Thus, MBMR intends to maintain a dividend payout policy of a minimum of 60% at the holding company level. Nonetheless, we maintain our full-year DPS assumption at 12.0 sen (c.25% dividend pay-out, on the group level) as MBMR typically pay DPS in the 2H at a same level of DPS pay-out as in the 1H.

Outlook. MBMR is a proxy to Perodua from its deep value stake in 22.58%-owned Perodua and dual-income streams as the largest Perodua dealer and as a parts supplier for most of the popular marques. Perodua has 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 (25k bookings, 17.9k delivered). Perodua is 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.

MBMR share price has risen an impressive 93% YTD and we believe that much of the positives could have been priced in at this juncture. Downgrade to MP from OP with unchanged TP of RM4.40, based on PER of 9x FY20E EPS (at 5-year Fwd. historical mean PER). In our opinion, a premium to mean valuation is difficult to justify given (i) the slowing earnings growth momentum and (ii) that a significant portion of earnings are derived from the associate level.

Risks to our call include: (i) a sharp downturn in the economy leading to lower-than-expected car sales volume, and (ii) lower-than-expected associates’ contribution.

Source: Kenanga Research - 26 Aug 2019