MBMR is optimistic that Perodua will end 2023 with another sales record, i.e. 314k units (+11.3%). Easing input costs and supply constraints, and efficiency gains from high production volumes of new models, will boost manufacturing margins. Meanwhile, the current new bookings of 35k-40k per month have already surpassed pre-pandemic levels. We maintain our forecasts, TP of RM4.70 and  OUTPERFORM call. The stock also offers an attractive dividend yield of >7%.

We came away from MBMR’s 1QFY23 results briefing last Friday feeling upbeat. The key takeaways are as follows:

1. MBMR believes the worst of margin squeeze at both of its manufacturing segment and associate, Perusahaan Otomobil Kedua  Sdn Bhd is over. Recall, despite recording QoQ decrease in Perodua unit sales to 78,564 units (-8% QoQ), its manufacturing segment profit more than doubled, while, the 22.58%-owned manufacturing associate delivered a significant jump in share of profit by 40%.  MBMR indicated that metal prices, freight cost, USD/MYR exchange rate, and supply constraints at key local part suppliers have since stabilised to a more favourable level, with further boost from the ending of prosperity tax. Additionally, higher production level from all-new Perodua Axia helps to run down the high-cost inventories at a  much faster rate. Moreover, in 1QFY23, MBMR received RM5m in one-off costs recovery from its OEM customers (i.e. Daihatsu,  Perodua & Proton) as part of cost-sharing arrangements from  sudden jump in materials costs in 4QFY22.
    
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 is still receiving overwhelming reception and the Perodua production line is not affected by the recent news on Daihatsu’s crash test issue in Japan. On average,  Perodua received 35k-40k new bookings per month, exceeding the pre-pandemic levels. Perodua will release two more face-lifted models this year and is committed to one new model each year which could be officially launch in early 2024 (B-segment model).

Forecasts. Maintained.

We also maintain our TP of RM4.70 based on PER of 8x on FY24F  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).

We continue to like MBMR for: (i) its strong earnings visibility backed by an order backlog of Perodua vehicles of 190k 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. The stock also offers an attractive dividend yield of >7%. 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 - 29 May 2023