MBMR is optimistic on Perodua vehicles hitting another sales record, of 314k units in 2023 (+11.3%). Cost pressures faced in 4QFY22 should also gradually ease towards 2QFY23 as prices of commodities and key components are softening. Another special dividend could be in the offing should the planned disposal of a property materialise. We maintain our forecasts, TP of RM4.60 and OUTPERFORM call. The stock also offers an attractive dividend yield of >6%.

We attended MBMR’s 4QFY22 results briefing yesterday and the key takeaways are as follows:

1. MBMR believes the worst of margin squeeze on Perusahaan Otomobil Kedua Sdn Bhd is over. Recall, despite a record sales volume, the 22.58%-owned manufacturing associate delivered a weak bottomline in 4QFY22 due to high metal prices and freight cost, unfavourable USD/MYR exchange rate, and supply constraints at key local part suppliers (due to labour shortages) resulting in costlier parts sourced from overseas markets. However, prices of commodities and key components have since softened and margins should improve as it gradually runs down the high-cost inventories over the next 3-6 months.

2. MBMR echoed the record sales guidance for 2023 by Perodua of 314k units (+11.3%) and shared that the production target of 330k units (+14.1%) set by Perodua is achievable. Perodua has the highest localisation rate of 95% in the automotive industry and its production is running smoothly at maximum capacity, with minimal supply-chain interruptions. Perodua Manufacturing (PMSB) and Perodua Global Manufacturing (PGMSB)’s plants combined capacity is 320,000 units. Running a two-shift cycle, further volume expansion is in the pipeline, riding on improved productivity and higher overtime. We are keeping our Perodua’s TIV assumption of 314,000 units and 320,000 units for FY23 and FY24, respectively.

3. MBMR shared that the all-new Axia has received overwhelming reception with current orders backlog increasing to 27k units compared to 20k units during the official launching day last week. Perodua will release two more face-lifted models this year and is committed for one new model each year which could be officially launch in early 2024.

4. MBMR indicated that it is planning to dispose off a property this year, carried as asset held for sale valued at RM20.1m. Hence, another special dividend could be in the offing should this materialise. Note that, in the recent 4QFY22 results release, MBMR surprised with special dividend of 15.0 sen post disposal of a property valued at RM44.8m.

We maintain our TP of RM4.60 based on 7x FY23F EPS which is at a discount to the auto sector’s average forward PER of 11x given its smaller scale, and business model which is skewed toward auto dealerships compared to other players which are more into auto manufacturing. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 4). The stock also offers an attractive dividend yield of >6%.

We like MBMR for: (i) its strong earnings visibility backed by an order backlog of Perodua vehicles of 220k units, (ii) it being a good proxy to the mass-market Perodua brand given that it is the largest dealer of Perodua vehicles in Malaysia as well as its 22.58% stake in Perusahaan Otomobil Kedua Sdn Bhd, the producer of Perodua vehicles, and (iii) its Tier-1 OEM auto parts manufacturing certification. Maintain OUTPERFORM.

Risks to our call include: (i) consumers cutting back on discretionary spending (particularly big-ticket items like new cars) amidst high inflation, (ii) persistent disruptions (including chip shortages) in the global automotive supply chain, and (iii) persistently high cost for materials in auto parts manufacturing.

Source: Kenanga Research - 22 Feb 2023