• Downgrade to NEUTRAL from Buy, new MYR3.30 TP from MYR5, 6% downside. Despite MBM’s solid 1Q23 results, we downgrade our stock recommendation to NEUTRAL, as we think its earnings could soften YoY on an anticipated slowdown in car sales in 2024. However, we still advocate investors to hold the stock for its attractive 10% yield. Its current share price implies 6x FY24F P/E, which we think is fair – in line with its 5-year historical average, as prospects are neither excessively positive nor negative.

• Impressive results, on top of a rosy 2023 outlook. MBM's 1Q23 results met our expectations and exceeded the Street forecast (at its 32% full-year estimate). At its post-results briefing, management was optimistic about 2023, as MBM’s bright outlook should be driven by Perodua’s strong order backlog of 190k units. This puts Perodua on track to achieve its sales target of 314k units (our forecast: 320k units) in 2023. However, our outlook of 2024 differs from that of management’s. We think that there could be softer car sales in 2024, while it believes that 2024 sales could remain near that of 2023.

• However, we think that a strong 2023 is largely priced in. There is a general consensus in the market that 2023 will likely be a strong year for Perodua. We think that investors are currently keeping a close eye on a potential slowdown in orders, as it can be an early indicator of declining earnings.

• Car sales to normalise in 2024. We are expecting Perodua's sales volume to soften 22% YoY to 250k units in 2024. We are seeing very early signs of a slowdown in orders, as Perodua's order backlog has softened to 190k units from end-February's 220k units. Without any fresh catalysts to boost new orders, these numbers could gradually soften throughout 2023 – which will translate into weaker 2024 deliveries.

• Forecasts. We maintain our FY23-25 estimates, as we have already factored in the gradual softening in car sales.

• Our new, lower TP of MYR3.30 is now based on 6x FY24F P/E (previously 7x FY23F P/E), which is at its 5-year mean. The lack of a valuation premium is due to the potentially softening sentiment towards auto stocks. In addition, we roll forward our valuation to reflect FY24F EPS, as we think that the market will gradually price in FY24 earnings. Our TP includes a 4% ESG discount, based on an unchanged ESG score of 2.8 – which is below the country median of 3.0.

• We downgrade our call to NEUTRAL as the stock lacks fresh catalysts. That said, we still advocate investors to hold on to the stock for its handsome 10% dividend yield, which is the highest in the sector. MBM is trading at 6x FY24F P/E, which we think is fair and reflects a balanced risk- reward ratio. Downside risks include softer-than-expected orders and deliveries, worse-than-expected FX movements, and higher-than-expected costs. The opposite represents upside risks.

Source: RHB Research - 2 Jun 2023