9MFY19 core PATAMI of RM152.4m (+25% YoY), came in above both our and consensus expectation at 81% each of full-year estimates due to higher-than-expected associates’ contribution. We expect better sales in 4QFY19 from seasonally stronger year-end promotion. Note that, Perodua already recorded a huge jump of 34% MoM in October unit sales. We upgrade our FY19-20E CNP by 6-8%, on higher associates’ contribution and call to OP from MP with a higher TP of RM4.75 from RM4.40, based on unchanged PER of 9x FY20E EPS.

9MFY19 above expectations. 9MFY19 core PATAMI of RM152.4m (+25% YoY), came in above both our and consensus expectation at 81% each of full-year estimates due to higher-than-expected associates’ contribution. No dividend was declared for the quarter which is typically paid in 2Q and 4Q. Note that the 9MFY19 core PATAMI was adjusted to exclude: (i) RM24.8m gain on disposals of 22% stake in associate, Hino Motors (from 42% to 20%), and (ii) gain on disposal of assets classified held for sales of RM11.9m.

YoY, 9MFY19 core PATAMI rose 25% boosted by higher associates’ contribution (+28%), and improved motor vehicles trading division’s performance (higher segment margin by 1.0ppt to 2.5% from 1.5% in 9MFY18), as both benefited from Perodua’s sales volume of 178,668 units (+6%) buoyed by the all-new Myvi, with further boost from the allnew Perodua ARUZ. Furthermore, its auto parts segment recorded higher PBT of RM8.6m (+9%) from the cessation of its loss-making alloy-wheels plant as well as from improved production efficiency. Note that, the top three selling models 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, 3QFY19 core PATAMI rose 6% mainly from the higher associates’ contribution, Perodua (+7%) driven by better merchandise mix with the ramp-up in sales of Perodua ARUZ (25k bookings, 22.2k delivered) despite Perodua recording lower unit sales of 56,972 (-7% QoQ), which in turn also affected the group revenue (-8%) as well as its Auto parts manufacturing segment (-42%). 3QFY19’s seasonally lower sales came from the absence of festivities and shorter working period.

Outlook. We like MBMR for its: (i) its deep value stake in 22.58%- owned Perodua, and (ii) dual-income streams as the largest Perodua dealer and as parts supplier for most of the popular marques. Perodua continued to record stronger sales, with a market share of 41%, premised on higher delivery of all-new Myvi and all-new Perodua ARUZ (25k bookings, 22.2k 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.

Increased FY19-20E CNP by 6-8%. We increased our FY19-20E CNP by 6-8% to reflect higher associate contributions.

Upgrade to OP from MP with a higher TP of RM4.75 from RM4.40, based on PER of 9x FY20E EPS (at 5-year Fwd. historical mean PER). Note that, MBMR’s share price has retraced by 13% since our last downgrade to MP call.

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 - 22 Nov 2019