KEY INVESTMENT HIGHLIGHTS

• 3Q19 earnings met our highest-among-consensus estimates and was ahead of street expectations

• Solid earnings improvement driven by Perodua, parts manufacturing broke even

• Debt levels pared down 68%qoq, net cash accounts 7% of market cap

• Reaffirm MBM as our top BUY at unchanged TP of RM4.55/share, solid 6.7% FY20F yields on the back of just 7x FY20F PER
   

Earnings outperforms consensus. MBM registered 3Q19 net profit of RM56m, which brought 9M19 core earnings to RM155m (excluding a RM25m gain on disposal of a 22% stake in Hino recognized in 2Q19). This is well within our (highest among consensus) estimates but ahead of street expectations, accounting for 77% and 83% of FY19F respectively. We expect a strong share price re-rating today.

Dividends. No interim dividends were declared in 3Q19, but we look forward to a meaningful final dividend in-line with the MBM’s new dividend policy of a minimum 60% payout at the holding company level (estimated 40%-45% payout at group level), implying attractive dividend yield of 6.3% (FY19F).

Solid earnings improvement. Group core net profit improved some 54%yoy on the back of a 37% improvement in associate earnings, 18% improvement in JCE earnings and 30% increase in operating profit (mainly from motor trading, or dealership units).

Perodua continues sales streak. Associate earnings (driven mainly by MBM’s effective 22.6% stake in Perodua) improved 37%yoy in 3Q19 given improved Perodua invoiced volumes (+21%yoy). This in turn was mainly driven by the addition of Aruz which fills a gap in Perodua’s mix since Jan19.

Dealerships riding on strong Perodua sales. The group’s dealership division registered a 34%yoy increase in earnings driven by higher Perodua sales by DMMS (+9%yoy), Daihatsu sales were flattish year-onyear but was higher by 29%qoq given sizeable fleet sales in the quarter. Additionally service throughputs which carry higher margins rise 12%yoy and an 8%qoq increase.

Parts manufacturing broke even. The overall parts manufacturing division (inclusive of the discontinued alloy wheel operations) brokeeven in 3Q19, registering a pretax profit of RM0.5m. The “continuing” parts manufacturing unit saw 26%yoy decline in earnings due to lower volumes in 3Q19 (given festive holidays in Jun19 and numerous public holidays in Aug19). However, this was more than offset by a meaningful decline in losses at the alloy wheel operations to just RM1.8m (vs. RM4.4m loss in 3Q18). The alloy wheel plant had ceased operations in 2Q19, but incurred additional closure expenses and plant machinery maintenance costs in 3Q19.

Source: MIDF Research - 22 Nov 2019