• Maintain BUY and MYR5 TP, 28% upside. Yesterday, we attended MBM’s 4Q22 earnings briefing and were reassured of our optimistic view on the stock. MBM’s management is confident of Perodua’s ability to achieve its 2023 sales and production targets, which should drive not only the associate contribution (20%-owned Perodua typically contributes >90%), but also its motor trading and auto parts manufacturing divisions. BUY for 9.2% FY23F yield, special DPS, and a strong 2023 Perodua performance.

• More colour on 4Q22 results. QoQ, its auto parts manufacturing revenue slid 8% while operating profit fell 57%, mainly due to the high number of scheduled shutdowns by carmakers. The operating margin erosion (to 3.1% from 6.6%) was a result of higher operating costs (eg input and labour) and low utilisation rates. That said, MBM is working hard to pass on the higher input costs and, therefore, margins for its auto parts manufacturing should gradually recover in the coming quarters. As we suspected, MBM’s associate contribution only rose 4% QoQ compared to Perodua’s 23% increase in sales volume, mainly due to cost pressures. YoY, its associate contribution fell 52% mainly because Perodua enjoyed an investment tax allowance in 4Q21, which was absent in 4Q22.

• We have conservatively assumed softer Perodua margins YoY, given the marque’s elevated input and operating costs, coupled with its promise to not raise prices of existing models. However, Perodua’s and MBM’s management teams think that input costs could peak in mid-2023 and 2Q23 (respectively), before easing – which could drive margin expansion.

• Pipeline update. Perodua may release an even lower-specification variant of the second-generation Axia in 2Q23, potentially with a <MYR30k price tag – which could further fuel its orders. Currently, Perodua has 27k orders for the new Axia, with 10k new bookings between 31 Jan to 20 Feb, while the other 17k are old orders converted into the new Axia. Perodua will likely introduce another all-new model in early 2024, with production preparations to begin in end-2023. Since Sep 2022, Perodua has launched a subscription plan for the Ativa Hybrid (rebadged Daihatsu Rocky Hybrid CBU from Japan) in order to prepare for its eventual launch of a hybrid vehicle.

• We maintain our earnings estimates, and highlight that despite MBM’s historic high FY22 dividend, it is still sitting on a multi-year high cash pile (MYR0.72 per share), which according to management, gives it ammunition for future M&A and dividends. As such, we think that there could be more special dividends in FY23. We reiterate our MYR5 TP (includes 4% ESG discount) and BUY recommendation, premised on: i) Its handsome 9.2% yield plus potential FY23 special dividends, and ii) a likely record-breaking 2023 for Perodua.

• Key downside risks include weaker-than-expected orders and deliveries, and resurgent supply chain constraints.

Source: RHB Research - 22 Feb 2023