• Maintain NEUTRAL, new MYR4.70 TP from MYR4.10, 7% downside. 1Q24 earnings outperformed our and Street estimates due to stronger-than- expected associates’ contributions. As MBM Resources’ share price has gone up by >20% YTD, we believe the strong Perodua sales are already in the price. As such, we recommend investors to retain their positions in MBM for its attractive c.10% FY24F yield.

• Above expectations. 1Q24 core net profit of MYR80m exceeded our and Street’s expectations, making up 31% and 32% of FY24F earnings. MBM did not declare any dividends in conjunction with the 1Q24 results, as expected.

• Results highlights. Revenue fell 12% QoQ, which is expected given the high base in 4Q, but rose 11% YoY due to higher delivery of vehicles. However, core net profit fell by a higher 18% QoQ, as associate contributions weakened 20% QoQ due to lower production and sales of Perodua on the back of shorter working month. Its largest segment – motor trading and assembly – posted a 12% QoQ decline in revenue but EBIT fell by 29% – likely due to lower economies of scale achieved. Despite auto parts revenue falling 13% QoQ, its EBIT improved 9% QoQ due to a favourable sales mix and lower material costs.

• Outlook. With a current backlog of 100k units, we believe Perodua sales deliveries will remain robust despite the expected cyclical sector downturn. The carmaker has published its 2024 sales target of 330k units, which is comparable to last year’s 330,325 units. As 4M24 sales volume is 16% higher YoY with no signs of delivery slowdown, we think MBM’s associate contribution from Perodua should continue to comprise the lion’s share of the group’s earnings. MBM has also announced that it will enter into a new dealership with Jaecoo, a Chinese SUV brand. Although no guidance has been given, we believe this addition to its current offerings is beneficial for the group, as Jaecoo will be positioned to serve the mid-market segment, alongside with the former’s current mass-market and luxury brands.

• Forecasts. We lift our FY24F-26F earnings by 6-14%, mainly due to revision of Perodua sales volumes to 330k, 280k, and 280k units from 250k, 230k, and 230k units. We also raise MBM’s operating costs to better align with the current performance. We have yet to take into account the Jaecoo dealership into our forecasts, given the scarce details at this juncture.

• Our TP of MYR4.70 is based on 6.5x FY24F P/E (+1SD from its 5-year mean). Our TP includes a 4% ESG discount, as MBM’s ESG score remains unchanged at 2.8. We maintain our NEUTRAL call, as we believe the valuation is fair, while its c.10% FY24F dividend yield should provide support to the price. Key downside risks include lower-than-expected orders and deliveries, higher- than-expected costs, and resurgent supply chain constraints. The opposite represents the upside risks.

Source: RHB Research - 28 May 2024