INVESTMENT HIGHLIGHT

(from RM3.80)

• Management tight lipped on OMIA move

• Parts division performance driven by underlying volumes

• FY19F earnings raised 12%

• Re-affirm BUY at higher TP of RM4.20, MBM remains our top sector pick

FY19F earnings raised. We raise our FY19F earnings by 12% given MBM’s outperformance in its recent 4Q18 result and following an analyst briefing last Friday. We have mainly factored in higher earnings for the parts manufacturing division – Hirotako and Autoliv-Hirotako which are likely to be big beneficiaries of the recent national car launches. Although FY18 was exceptionally strong given the tax-holiday period, the Aruz (launched Jan19) is likely to drive Perodua’s 2019 TIV to a new record. Our FY19F is 16% above consensus.

OMI Alloy. Management was tight lipped on recent news reports on the disposal of OMI Alloy’s (OMIA) plant, other than indicating that they have been exploring options to stop the bleeding at OMIA and that negotiations have been going on since last year and that the process should not extend beyond a year if negotiations were successful. This should give a good yardstick to the timeline expected to be taken to conclude negotiations, we think. The elimination of OMIA will eliminate a major loss making unit and improve group earnings. OMIA registered net losses of RM38m/RM29m in FY16/17. OMIA as a company entails negative shareholders fund of RM179m as at end-FY17 (inclusive of the RM62m impairment taken) against total liabilities of RM224m and total asset of RM45m.

Parts manufacturing division turnaround. To recap, excluding the RM2m impairment and RM2.7m provision for OMI Alloy (which management is looking to sell off) the parts manufacturing division would have turned in a pretax profit of RM1.4m for 4Q18, against a loss of RM1.3m in 3Q18. The improved earnings were driven by core performance given higher volumes achieved by Hirotako (NVH products), Autoliv (airbags & seatbelts) as well as tyre assembly and alloy wheel division. This was given large orders to fulfil tax-holiday driven volumes as well as commencement of supplies to the Aruz – production ramp-up usually happens a few months prior to actual launch, which was in lateJan19. We would also note that impairments taken on goodwill on Hirotako as well as OMIA’s plant in FY17 helped to accelerate the breakeven given lower carrying value of the assets.

Fulfilled back orders. Associate earnings were up 65%qoq (+73%yoy) driven mainly by the fulfilment of back orders for the MyVi given the production disruption in 3Q18. Perodua invoiced volumes were up 23%qoq and 30%yoy. This is essentially tax-holiday driven volumes being delayed into the 4Q18. Meanwhile, 42%-owned Hino saw a 24%qoq contraction in volumes as sales normalised after strong 3Q18 performance.

Source: MIDF Research - 4 Mar 2019