INVESTMENT HIGHLIGHT

• 2Q18 beat estimates

• Strong RM supported Perodua earnings but temporary production blip hit auto parts division

• New national SUVs potential near-term catalyst

• Maintain BUY at unchanged TP of RM3.20

Results beat estimates. MBM’s 2Q18 results beat estimates. The group reported net profit of RM35m for its 2Q18, which brought 1H18 earnings to RM67m. This accounted for 62% and 70% of ours and consensus’ FY18F respectively. The stronger than expected earnings came mainly from Perodua given stronger than expected Perodua TIV and peak RM:JPY in the period. An interim dividend of 3sen/share was declared, double that of last year’s 2Q18.

Tax-holiday driven strength. The 2Q18 captured the maiden month of the tax holiday period (running from June till end Aug18) and naturally saw auto dealership earnings expand 24%qoq. Improved volumes were seen across all brands carried by DMMS (Perodua dealerships) and Federal Auto (Volvo, VW, Mitsubishi) (See Exhibit 1). Associate earnings (mainly captures MBM’s 22.5% share of Perodua earnings) expanded by just 7%qoq and we think this mainly reflects a stronger RM against JPY in the period more than anything else. Perodua’s invoiced sales actually came off 10%qoq given possible delay in purchases by dealers to avoid complications in the transition to a zero-rated GST from 1st June. Perodua earnings should improve in 3Q18 as sales ride on the short-term tax-holiday hype.

Cautious on post-SST weakness. Perodua maintained its 2018 forecast of 209K units in anticipation of weakness from September onward after SST is reintroduced. Whilst we acknowledge this, we think the weakness is temporary and beyond 2018, possibly improved consumer spending power could drive a structural improvement in demand. More importantly, Perodua is scheduled to launch its SUV model by year-end, which plugs an important gap in its model mix. Channel checks suggest pricing in the range of RM70K-80K and the model is likely to be timed close to Proton’s SUV launch scheduled in 4Q18.

Expect TIP improvement in 3Q18. Revenue for auto parts manufacturing was lower by 14%qoq in 2Q18 given OEM plant closures in the period (typical 2 weeks closure during Raya holidays) which resulted in slightly higher losses at RM4m in 2Q18. Total Industry Production (TIP) reduced 20%qoq but is expected to bounce back strongly in 3Q18 as production resumed full scale in July to meet the strong short-term demand during the tax-holiday period. From a structural standpoint, we are still cautious on Proton’s 30% vendor cost down plans which may hit vendors’ margins negatively if implemented. That said, plans for a new national car, which may increase local part demand could turn out to be a positive catalyst, provided minimal cannibalisation of existing clients’ volume.

Source: MIDF Research - 29 Aug 2018