• Still NEUTRAL, with new MYR3.60 TP from MYR3.30, 2% downside. 2Q23 earnings met our and Street expectations. Net profit fell 35% QoQ, mainly from a 16% drop in Perodua sales volume, largely due to a seasonally shorter quarter. Conversely, the 26 sen DPS exceeded our expectations, prompting an upward revision in our DPS estimates, now yielding 15% and 11% in FY23F-24F. Despite a softer FY24 outlook, we still advocate investors to hold MBM Resources for its handsome yield.
• Earnings in line, DPS surpassed expectations. MBM's 2Q23 core net profit of MYR52m brought 1H23 earnings to MYR132m, making up 46% and 52% of our and Street estimates. It is within our expectations, as we are expecting a seasonally stronger 2H. It declared an interim DPS of 6 sen and a special DPS of 20 sen. Its YTD DPS of 26 sen is above our full year estimate of 36 sen. Note that since FY22, MBM has started paying two rounds of special dividends, in conjunction with its 2Q and 4Q results.
• Promising dividend potential. Its YTD DPS of 26 sen represents a 77% dividend payout ratio (DPR), similar to its FY22's 75% DPR. Note that these ratios are higher than MBM's dividend policy to pay out at least 60% of its net profit. Given the strong cash flow from its associates and little need for large capex in the coming years, we lift our FY23F-25F DPS to 56 sen-33 sen, from 36 sen-28 sen, implying a DPR of 76%, 70% and 70%. Should the company continue to deliver DPR of c.75%, there is an upside potential to our FY24F-25F DPS.

• Perodua on track to recording new high in 2023, but what about 2024? 7M23 Perodua unit sales stood at 173k units. As we are expecting a seasonally stronger 2H, we maintain our 2023 Perodua sales target of 320k units, beating 2022's 282k record. After potentially two consecutive years of record-breaking Perodua sales, we think sales could soften to 250k units in FY24, falling 22% YoY. Note that Perodua's order backlog stood at 220k as of end-February, and 190k as of end-May. We think its order backlog will likely further soften between May and August.
• We maintain our earnings estimates, as the results are in line.
• Still NEUTRAL, with higher TP of MYR3.60, which includes a 4% ESG discount. We now ascribe a 6.5x P/E on FY24F earnings (previously 6x P/E). The 6.5x P/E is around +1.5SD above its 5-year mean of 5x. We think the premium is justified as the stock could potentially rerate on its promising dividend potential, especially if it maintains a high DPR. Although we are forecasting softer vehicle sales and earnings in FY24, we think investors should continue to hold the stock for its handsome FY23F-24F yield of 15% and 11%. Key downside risks include lower-than-expected orders and deliveries, lower-than-expected dividend payout ratio, and resurgent supply chain constraints. The converse represents the upside risks.

Source: RHB Securities Research - 24 Aug 2023