KEY INVESTMENT HIGHLIGHTS

• 3Q20 results outperformed expectations
• Strong rebound in 3Q20 earnings (+17%yoy) driven by improved TIV and production; dealerships and parts manufacturing benefitted from higher throughput and cost reduction
• reduction
• MBM expects the strong 3Q20 performance to sustain into 4Q20 from carryover bookings and sustained sales trends
• FY20F/21F earnings revised up by 9%/3%
• Maintain BUY at higher TP of RM3.90 from RM3.40 previously as the sector transitions into a recovery cycle

Outperformance in 3Q20. MBM kicked off an anticipated strong earnings season for the auto sector with outperformance in its 3Q20 results. The group reported a RM65m net profit for its 3Q20, which brought 9M20 earnings to RM87m. While the 9M20 results accounted for 70%/68% of our and consensus’ FY20F, the 3Q20 earnings alone made up 74% of MBM’s 9M20 net profit, reflecting a full quarter of the PENJANA sales tax incentive which commenced mid-June. Both our and consensus’ FY20F earnings imply just a RM37m/RM42m net profit for MBM’s 4Q20 (relative to 3Q20’s RM65m), which we now think is too conservative. Though we had anticipated positive spillover from the improved TIV on MBM’s motor trading and auto parts manufacturing units, the actual performance of these divisions were stronger than expected. Furthermore, despite the delay in launch of Perodua D55L (from late-FY20 to early FY21F), Perodua TIV seems to be on track to achieve its targeted 210K units for FY20F.

Key takeaways. 3Q20 earnings rose 17%yoy to RM65m driven by improvements of associates (+3%yoy) (mainly comprising of MBM’s 22% Perodua stake), as well as the auto parts manufacturing unit (+74%yoy) and motor trading division (+97%yoy) (dealership unit); the latter was partly driven by cost reduction measures undertaken during the MCO in 2Q20. For the motor trading division, sales of Perodua (+36%yoy) and VW models saw improved performance, but Volvo sales were constrained by limited supply in 3Q20. The group expects the strong sales in 3Q20 to sustain into 4Q20 driven mainly by the tax holiday and carry forward orders for Volvo.

Earnings revision. Given the outperformance in 3Q20, we raise our FY20F/FY21F earnings by 9%/3% to factor in higher earnings for the motor trading and auto parts divisions. We project a 26%yoy growth in FY21F earnings, to be driven mainly by the expected introduction of Perodua D55L (B-segment SUV) in 1Q21 and the accompanying spillover benefits on MBM’s motor trading and auto parts manufacturing.

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 and aggressive new model introductions by the national cars e.g. the Proton X50 and the Perodua D55L (3) Federal Auto, positioned in the mid-to-high- end price segments, to benefit from broad improvement in TIV.

Recommendation. Maintain BUY at higher TP of RM3.90 (from RM340), following the upward earnings revision in this report and pegging MBM at a higher 9x PER (from 8x previously) as the sector transitions into a recovery cycle. Key catalysts: (1) Earnings recovery from 3Q20 onwards (2) Launch of Perodua’s D55L i.e. new B-segment SUV, which plugs an important gap in its model mix (3) Sale of OMIA assets (4) Higher dividends on the back of an underleveraged balance sheet.

Source: MIDF Research - 20 Nov 2020