Post 1HFY20 results briefing, we maintain our cautious view on MBMR as we expect recovery in 2H of the year under the SST exempted period will likely be limited by a delayed new launching (Perodua D55L SUV), and higher production costs to deliver back-logged bookings (i.e.weakening MYR against USD, extra working hours due to social distancing requirement, and additional auto parts outsourcing costs), which could further be affected by bottlenecks in auto parts supply chain during this global pandemic. Maintain UP with unchanged TP of RM2.80.

Weak 1H, recovery in 2H likely to be limited. Perodua’s 1HFY20 sales volume was severely affected, skidding to 74,170 unit (-39%YoY) due to the MCO. For 2HCY20, starting July 2020, Perodua aims to produce 25k units/month (98 to 99% of its production capacity) to catch up on back logged bookings. Nonetheless, the performance would not be the same as last year, despite the expected encouraging sales numbers due to related costs, with targeted models mix of Myvi 30%, Axia 30%, Bezza 24%, Aruz 10%, and Alza 6%. We expect overall growth to be capped by the delayed new launching, and higher production costs to deliver back-logged bookings (i.e. weakening MYR against USD, extra working hours, and additional auto parts outsourcing costs), which could further be affected by bottlenecks in auto parts supply chain during this global pandemic. Management shared our concern especially on the social distancing which limit numbers of after-sales vehicles to be serviced (from average 30-35 pre-pandemic to c.20 vehicles/day currently) as well as extra working hours (due to social distancing) ramped up in production to meet up the demand. There are also additional costs incurred in May 2020 arising from the free Covid-19 test to employees (c.RM150/person for 300 employees).

Perodua D55L 5-seater SUV’s launch delayed. From recent news flow, Perodua President and CEO Datuk Zainal Abidin Ahmad concurred that the launching of Perodua D55L 5-seater SUV is expected to be delayed and it will not be making an entry this year. The Covid-19 related issues have delayed the planned upgrade and expansion of the Perodua plant (c.RM1.06bn), leaving the Proton X50 to launch ahead of close rival Perodua D55L (on similar price range of RM70k-80k) which we view as a costly lost marketing opportunity for MBM. Other new models from MBMR dealerships stable, namely the Volkswagen Arteon, Volkswagen Passat (R Line), Volkswagen Tiguan Allspace (7-seater), and Volvo S90 (facelift) while fine names in their respective segments lack the significance in terms of overall contribution to unit sales at less than 10%.

Disposal of alloy-wheels plant delayed due to the travel restriction. MBMR is still negotiating with the potential buyer for its alloy-wheels 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. Machineries will be sold separately with its plant and land. MBMR is expected to record one-off gain from this plant disposal and have separately recognized OMI contribution under discontinued business.

Outlook. Despite the 2H sales recovery evident, we are concerned that lit may disappoint consensus due to lower operating margins for the aforementioned reasons. MBMR’s business strategy lies in: (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. While Perodua’s market share is supported by Myvi, ARUZ, and Bezza, Perodua is however cautious for the rest of 2020 due to challenging factors such as intense competition, weakening consumer sentiment, stringent hire-purchase requirement and global economic uncertainties.

Maintain UNDERPERFORM with a TP of RM2.80, based on 7x FY21 EPS (-1.0 SD to its 5-year forward historical mean PER). Risks to our call include: (i) higher-than-expected car sales volume, and (ii) higher-than expected associates’ contribution.

Source: Kenanga Research - 24 Aug 2020