• Stay BUY with a new MYR4.77 TP from MYR4.95, 21% upside. At MYR190.6m, FY19 earnings were below our and Street’s expectations. 4Q19 motor trading sales disappointed too on an unfavourable sales mix, in our view. Yet, Perodua and Volvo hit record sales, with volumes of 240,341 and 2,361 units. Hence, future earnings growth should be driven by an expansion of Perodua’s product range and improvements in operational efficiency.

• Coming up short. MBM Resources’ FY19 results were below our and consensus expectations, with core earnings of MYR190.6m (+1% YoY) accounting for 90% and 93% of our and consensus’ full-year estimates. The miss was mainly attributed to lower-than-expected 4Q19 motor trading sales despite MBM-related brands recording higher sales volumes. We believe this was on an unfavourable sales mix. We overestimated Hino Motors’ associate contributions too, post disposal of the 22% stake. However, MBM’s operations remain solid, with its related brands recording stronger sales volumes (Figure 3). A 7 sen DPS was declared, taking full-year DPS to 13 sen (FY18: 6 sen).

• Competition intensifies. Perodua sales reached a new record in 2019, but moving forward, we expect it to face stiff competition from Proton, as the latter recently refreshed its products line-up and intends to introduce one new model annually. Proton’s Saga overtook Perodua’s Bezza as the bestselling A segment sedan towards end-2019 after the former received a facelift. The hatchback and small MPV segment also saw both brands going head-to-head – Perodua and Proton’s Myvi vs Iriz and Alza vs Exora. Both brands also expect to introduce a B-segment SUV in 2H20. Despite the competition, we expect both to benefit from the current macroeconomic environment and cautious consumer sentiment. This is as cost-conscious consumers trade down for better value-for-money options. In the near term, Perodua’s 1Q20 sales will likely be affected by the supply disruption caused by a fire at its paint shop. The models affected were the Myvi, Alza, and Aruz, although we were unable to quantify the severity of the event.

• Volvo continues to do well, with sales growing 28.7% YoY. The S60 will be locally assembled later this year and should be offered in several variants vis- à-vis the current CBU model, which is just a single variant. The S90 facelift should also be introduced later this year. Notably, Volkswagen sales dropped 20.6% YoY vis-à-vis the sales during the prior high base tax-free period.

• Key risks and forecasts. We trim our FY20F-21F earnings by 4% after imputing a more conservative sales assumption and realistic Hino Motors associate contributions. Weaker-than-expected consumer sentiment could pose downside risks to our call and TP.

• We reiterate our call with a new TP, which is derived from applying an unchanged target P/E of 9x (5-year mean) to the revised 2020 earnings. In our opinion, MBM is undervalued, trading at just 7.5x P/E vis-à-vis the peers’ average of 12x. Expansion of Perodua’s product range and improvements in operational efficiencies are key earnings drivers.

Source: RHB Securities Research - 3 Mar 2022