INVESTMENT HIGHLIGHT

• 2Q19 met our expectation but ahead of consensus

• Generous dividend policy a positive surprise, strong catalyst for valuation re-rating

• Elimination of OMIA drag from 3Q19 onwards

• Re-affirm BUY at unchanged TP of RM4.20, 8% yield attractive

2Q19 beats consensus. MBM reported core earnings of RM49m for its 2Q19 (excluding a RM25m gain on disposal of 22% stake in Hino), bringing 1H19 core earnings to RM99m. This is well within our expectation (which is among the highest on the street) but ahead of consensus accounting for 54% and 59% of FY19F estimates respectively. An interim dividend of 6sen/share was declared, significantly higher than the 3sen/share announced in 2Q18.

More aggressive dividend policy. A positive surprise, MBM is adopting a new, more aggressive dividend policy of a minimum 60% payout, which is a significant improvement versus the 14% payout seen in the past 2 years (See Exhibit 2). At our current FY19F, implied dividends at 60% payout translate to a generous 7.7% yield. Share price should react very positively to this announcement today. In fact, this could potentially address the drag on MBM’s valuations which have historically traded at a discount (below 9x PER) against the sector’s ~12x, and catalyse a strong valuation re-rating.

Strong demand for Perodua. Associate earnings comprising mainly of 22.6%-owned Perodua, increased 29%yoy driven by the Aruz and existing MyVi and Axia models – underpinning our thesis of record TIV for Perodua this year. Perodua’s invoiced volumes increased by 9%yoy; the 2Q19 reflects full quarter contribution of the Aruz.

Elimination of OMIA drag is the next catalyst. MBM ceased operations of its loss making alloy wheel plant mid-2019. This should eliminate a key drag to earnings from 3Q19 onwards. OMIA registered net losses of RM38m/RM29m in FY16/17 and is estimated to have reported RM20m-RM30m losses in FY18 (RM5m-RM6m/quarter); this translates to ~10%-15% improvement to group earnings on annualised basis. OMIA as a standalone company is estimated to entail negative shareholders fund of RM179m as at end-FY17 against total liabilities of RM224m and total asset of RM45m. Our forecasts (which are already 9%/15% higher than consensus) are under review pending a briefing this week, but we raise our dividend payout assumption to 60% from 25% previously.

MBM (BUY) remains our top sector pick at unchanged TP of RM4.20. At just 7x FY20F earnings coupled with an attractive 8% yield, MBM remains a cheap proxy to Perodua’s volume expansion and the spillover on its parts manufacturing and Perodua dealership units. Key catalysts: (1) Strong 6%yoy Perodua TIV expansion (FY19F) on the back of the Aruz to fill up a vacum in Perodua’s model mix (2) A recovery in industry production driven by the new national car launches. Risk to our call is weaker than expected demand for the Aruz and a weak Ringgit.

Source: MIDF Research - 21 Aug 2019