INVESTMENT HIGHLIGHT

• 9M18 results beat estimates, strong Hino sales despite weak Perodua volumes

• New national SUVs potential near-term catalyst

• FY18F/19F earnings raised 17%/10%

• Maintain BUY at unchanged TP of RM3.20

Results beat estimates. MBM’s 3Q18 results were ahead of expectations. The group reported core net profit of RM36m (excluding RM1.9m one-off gain on disposal of property) for its 3Q18, which brought 9M18 core earnings to RM104m. This accounted for 95% and 84% of our and consensus’ FY18F respectively.

Associates supported by Hino. Despite weak Perodua invoiced volumes in 3Q18 (-10%qoq / -1%yoy), associate earnings were supported by stronger volumes from Hino (+63%qoq / +45%yoy). This is in contrast to our earlier expectation of a weak 3Q18 arising from the MyVi production disruption in September (which was only rectified in October). We suspect Hino’s strength could be due to fleet sales (as enterprises take advantage of the tax-holiday period) and may not be sustainable.

Supply shortage. MBM’s dealership division registered a 5%qoq revenue contraction while earnings would have contracted if not for a one-off gain on property disposal of RM1.9m. Despite strong demand in 3Q18, there was a shortage of stock supply, which was made worse in September due to the MyVi supply issue.

Losses from parts manufacturing narrowed. Losses from MBM’s parts manufacturing division narrowed to RM1.3m in 3Q18 from RM4m in 2Q18. TIP (Total Industry Production) improved significantly in 3Q18 (+11%yoy / +12%qoq) but this strength is likely to be temporary as production was artificially boosted during the tax-holiday period. That said, we think underlying losses from the alloy wheel division could narrow going forward as contract manufacturing arrangement with China’s CITIC Dicastal takes off, targeted in 4Q18.

Earnings adjustments. We raise our FY18F/19F earnings by 17%/10% to reflect: (1) Higher Hino forecasts mainly for FY18F, (2) Higher Perodua TIV (at 216K units) as the YTD Oct TIV of 187,731 units looks likely to exceed our earlier projection of 209K units (FY18F), which was in-line with management’s forecast.

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 sub-RM80K range and the model is likely to be timed close to Proton’s SUV (CKD version) launch scheduled 1H19.

Source: MIDF Research - 23 Nov 2018