INVESTMENT HIGHLIGHT

• 1Q18 beat estimates

• Riding on new Myvi launch, spillover benefit to dealerships and parts manufacturing

• FY18F/19F earnings tweaked up 8%/3%

• Maintain BUY at higher TP of RM3.20

Results beat estimates. MBM’s 1Q18 beat estimates. The group reported net profit of RM33m for its 1Q18. This accounted for 32% and 34% of our and consensus’ FY18F respectively. However, the stronger than expected result was mainly due to lower than expected effective tax rate.

Solid earnings growth. MBM registered 69%yoy earnings growth driven by improvements across the board. The motor division saw earnings rose 17%yoy, parts division saw losses narrowing by 40%yoy while associate earnings rose by 41%yoy. Perodua (captured in associate line) benefited from launch of the new Myvi and the weaker JPY. Perodua invoiced volume grew 6%yoy while the Autoliv-Hirotako (AHSB) JCE saw a 5%yoy increase in revenues as a result of higher supply to OEMs, in line with higher TIP (total industry production) which rose 13%yoy in 1Q18.

Improved motor division. MBM’s auto dealerships saw strong throughput as it is a spillover beneficiary from launch of the new MyVi late FY17 and launch of the new VW Tiguan. This is on top of higher after sales service throughput (+8%yoy) which carries higher margins.

Lower manufacturing losses. Parts manufacturing losses shrunk in 1Q18. Similar to the AHSB JCE, the unit benefited from higher TIP. OMI (wheel manufacturing) saw revenue increase 34%yoy due to higher OEM take-up. There were also indications previously of OMI commencing new supplies to the Axia from 1Q18, which is likely to have driven the strong revenue growth. At thus juncture however, we are still cautious on Prootn’s 30% vendor cost down initiative which may hit margins negatively if implemented.

Housekeeping tweaks. The results were higher than expected mainly due to lower than expected effective tax rates, whereas other variables were largely in line. We tweak our effective tax rates lower to 6% resulting in our FY18F/19F earnings rising by 8%/3%.

Reaffirm BUY on MBM at a higher TP of RM3.20 (from RM3.10) following the earnings revisions. MBM is a cheap proxy to Perodua’s volume expansion and the spillover on its parts manufacturing and Perodua dealership units. Attractive 39%yoy earnings growth (FY18F) for less than half FY18F BV and on the back of a lean balance sheet (8% net gearing). Key catalysts: (1) Strong growth in Perodua TIV on the back of the new MyVi and potentially a new SUV to fill up a vacum in its model mix (2) A stronger Ringgit (3) A recovery in industry production driven by new national car launches.

Source: MIDF Research - 24 May 2018