KEY INVESTMENT HIGHLIGHTS

• 2Q20 was a washout quarter, but significantly backloaded year expected

• Interim dividend of 5sen/share declared, only marginally lower than 2Q19

• Expect a strong bounce from 3Q20 onwards; Perodua monthly TIV now hitting above pre-pandemic levels, up 33%yoy and 17%yoy in June and July.

• All other operating units from dealerships to parts manufacturing to benefit from strong TIV recovery

• Maintain BUY at unchanged TP of RM3.80

2Q20 within expectation. MBM slipped into the red in 2Q20, registering a net loss of RM5m, which brought 1H20 earnings to RM22m. Though this accounts for just 14% and 17% of our and street estimates respectively, we had expected earnings to be backloaded this year given the drag from the MCO in 1H20, but a significant boost in sales 2H20 from PENJANA’s sales tax holiday.

Washout quarter. 2Q20 was a washout quarter, but this had been well expected. The MCO ran from 18th March till 5th May, which affected most of 2Q20 given shutdown of manufacturing and sales operations. The sales tax holiday meanwhile, only kicked in towards mid-June. MBM’s parts manufacturing division turned in a loss of RM1.5m in 2Q20, JCE (consisting of Hirotako operations) registered a marginal loss, while associates registered a RM5m loss. Nonetheless, MBM’s dealership operations managed to turn in a pretax profit of RM5m given mitigative actions taken during the MCO to tighten cost control and manage working capital.

Boost from sales tax holiday. Despite weak March-May period, Perodua sales volume saw a dramatic improvement from June onwards following the sales tax holiday incentive initiated mid-June. Perodua’s June TIV of 21,250 units marked a 33%yoy increase and more than doubled its May TIV. This was followed by its latest July TIV of 23,203 units, which is a 17%yoy increase.

Other units to leverage on recovery. The sharp recovery in auto sales bodes well for MBM’s other operating units: (1) DMMS operates the largest Perodua dealership group and should benefit from a strong recovery in Perodua sales (2) Auto parts manufacturing unit benefits from a recovery in TIP (3) Federal Auto, positioned in the mid-to-highend price segments, to benefit from broad improvement in TIV.

Dividends largely maintained. Positively, dividends were largely unchanged despite the MCO impact in 2Q20. MBM declared an interim dividend of 5sen/share, only slightly lower than 2Q19’s 6sen/share.

Recommendation. Maintain BUY at unchanged SOP-derived TP of RM3.80. Key catalysts: (1) Earnings recovery from 3Q20 onwards (2) Launch of Perodua’s new B-segment SUV (3) Sale of OMIA assets (4) Higher dividends on the back of an underleveraged balance sheet.

Source: MIDF Research - 21 Aug 2020