KEY INVESTMENT HIGHLIGHTS

• Weak 1Q20 earnings; missed consensus expectations

• Perodua, dealership and part manufacturing units impacted by the movement control order (MCO)

• Generous dividends (final) for FY19 but unlikely to sustain into FY20F given weak underlying earnings outlook

• No changes to forecasts at this juncture; our FY20F/21F are 16%/8% below consensus

• Maintain NEUTRAL at unchanged TP of RM2.80

Weak start. MBM reported weak 1Q20 results. The group registered a net profit of just RM27m, which was broadly within our expectation but below consensus, accounting for 20% and 17% of FY20F earnings respectively. We expect earnings to weaken further in 2Q20 before gradual recovery from 3Q20 onwards. The magnitude of the recovery however, is still highly uncertain at this juncture given a deteriorating macro, employment and wage outlook, which is likely to dampen auto demand in the near-term. Our FY20F/21F are currently 16%/8% below consensus.

Generous FY19 dividends, but unlikely to sustain into FY20F. A final dividend of 9sen/share (for FY19) was proposed, which takes total FY19 dividends to 22sen/share (45% payout), largely within our expectations. This translates into generous yields of 7.9%, but we would bear in mind the cyclicality of MBM’s earnings which is affected by the Covid19 preventive measures and its impact on the underlying macro condition. We think the generous dividends are unlikely to sustain in FY20F and forecast lower yields of 4.9%.

Impacted by MCO. MBM’s 1Q20 group earnings fell -45%yoy and - 46%qoq following implementation of the MCO from 18th March (up until 5th May when it is replaced by a conditional MCO). Perodua invoiced volumes fell -17%yoy, which drove a -34%yoy contraction in associate earnings. Meanwhile the group’s Perodua dealership sales volume under DMMS fell -23%yoy, while Federal Auto saw a -31%yoy volume contraction. Overall motor trading division registered a -28%yoy fall in revenue and some -80% pretax contraction as fixed cost continues to be incurred despite absence of revenue in the final 2 weeks of 1Q20. The auto parts division was also affected by the MCO as well as pricing issues with certain carmakers; revenue fell -26%yoy while earnings contracted -59%yoy in the quarter. Management is undertaking countermeasures to tighten opex and capex while new marketing platforms are being implemented.

Recommendation. Maintain NEUTRAL at unchanged TP of RM2.80, pegging the group at 8x FY20F earnings. Despite the challenging outlook, balance sheet remains solid at a net cash of RM189m, while the sale of OMIA asset should further underpin the strong balance sheet position. Risk to our call is weaker than expected demand and a weak RM.

Source: MIDF Research - 22 May 2020