• MBM’s 3Q17 earnings beat our expectation
• Core earnings up 28%qoq on stronger earnings from Hirotako and Perodua dealerships

• Expect even stronger 4Q17 as Perodua earnings rebound on new MyVi with 3-4 months waiting list

• Re-affirm BUY at unchanged TP of RM2.45

Ahead of our expectation. MBM reported core earnings of RM21m for its 3Q17 which brought 9M17 core earnings to RM56m; excluding exceptionals: (1) M11m impairment on goodwill, and (2) RM2.5m inventory and tooling provision. The results were slightly ahead of our expectation and within consensus.

Inflection point came earlier than expected. While we had expected earnings to be weak in 3Q17 and only bounce in 4Q17, the earnings inflection point came earlier than expected. MBM’s core earnings were up some 28%qoq, although still slightly weak (-3%yoy) on-year due to still weak Perodua earnings (earnings from new MyVi to only materialise in 4Q17).

The auto parts unit, in particular Hirotako benefitted from initial supplies to the new MyVi which entails much higher airbag content; 4-6 airbags per car (reflected in the significant increase in JCE earnings). On top of that, MBM’s dealerships saw earnings rise by 67%qoq, likely from higher dealer incentives from Perodua and higher throughput volumes to drive run-out of the old MyVi. Perodua dealership volumes grew 30%yoy and 14%qoq. MBM is Perodua’s largest delaer accounting for ~10% share.

On the contrary, Perodua earnings (equity-accounted) fell 18%yoy and were flattish on-quarter as it takes a margin hit from the run-out of the old MyVi. We expect this trend to improve significantly in 4Q17 however, given launch of the new MyVi in November and the strong take-up with the latest 3-4 months waiting list. Management is targeting to sell 6K units/month of the new MyVi, a 30% increase versus average monthly MyVi sales in 1H17.

Inflection point reached. After a 19% fall in FY17F earnings impacted by the weak Ringgit, MyVi run-out as well as weak auto parts and dealership volumes given an industry slowdown, MBM is set for a strong earnings recovery from FY18F (+39%yoy). Underpinning our view are: (1) Significant launches by Perodua in the next 14 months, (2) A recovering Ringgit, (3) New model penetration by MBM’s alloy wheel division, and (4) A recovery in overall industry production following sustained TIV recovery since early FY17F.

Source: MIDF Research - 23 Nov 2017