MBMR is optimistic on another record year for Perodua with vehicle sales of 314k units (+11.3%). It is considering switching its dealership business to an agency model to boost margins. Meanwhile, at 35k-40k per month, the new bookings have surpassed pre-pandemic levels. We maintain our forecasts, TP of RM4.70 and OUTPERFORM call. The stock also offers an attractive dividend yield of >10%.

We came away from MBMR’s 2QFY23 results briefing last Friday feeling upbeat. The key takeaways are as follows:

1. MBMR reiterated the record Perodua sales guidance of 314k units (+11.3%) in 2023 and felt that the production target of 330k units (+14.1%) set by Perodua is achievable. Perodua has consistently achieved more than the monthly targeted production level, despite the shorter working months on the back of consecutive public holidays in April and June 2023. Perodua has the highest localisation rate of 95% in the automotive industry. It is currently running at maximum capacity with minimal supply-chain interruptions.

The plants of Perodua Manufacturing (PMSB) and Perodua Global Manufacturing (PGMSB) have a combined capacity of 320,000 units. Currently operating two shifts, there are plans to boost production by lifting productivity and increasing overtime. We are keeping our Perodua’s TIV assumption of 314,000 units and 320,000 units for FY23 and FY24, respectively.

2. MBMR is considering switching its dealership business to the agency model (started with its Volvo dealership) from the current franchise arrangement. This could boost margins by virtue of reducing inventory costs and capitalising on the current trend of e-commerce, while focusing on high-margin after-sales services business. The agency model involves a different relationship between the dealer and the franchise holder or manufacturer, whereby an agent does not own the stock of new cars in the showroom and the car remains the property of the manufacturer until it’s sold to the consumer, so the agent or dealer doesn’t bear the inventory risk.

3. MBMR shared that its all-new Axia has been well received by the market with a waiting period of 7-8 months. The current booking backlog of 40k units already makes up close to half of Axia’s production target of 82k units annually. On average, Perodua has received 35k-40k new bookings per month for all models, exceeding the pre-pandemic levels. Perodua will release two more face-lifted models this year and one new model each year (with the next one expected to due in early-2024, i.e. B-segment Perodua D66b).

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 170k 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 >10%. 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 - 28 Aug 2023