• Maintain BUY and MYR5 TP, 43% upside. 1Q23 earnings are in line with our estimates and beat the Street’s projection. As expected, Perodua’s costs eased along with improving supply chain conditions, which lifted associate contributions. Our channel checks indicate continued strong demand for Perodua vehicles, likely due to downtrading and new model launches – which supports our expectation of a strong year for the marque. We think MBM Resources’ earnings should remain resilient in the quarters ahead, and this may lead to a handsome c.10% dividend yield for FY23F.

• Within expectations. 1Q23 core net profit of MYR80m came within our expectations, making up 28% of our FY23 forecast (and at 32% of the Street’s full-year projection). No dividend was declared, as expected.

• Results highlights. Despite a 15% QoQ decline in revenue, core net profit rose 40% QoQ, mainly thanks to a 40% increase in associate contributions. Due to seasonal factors, its motor trading revenue slipped 16% QoQ on the back of a 8% decline in MBM’s marques’ volumes, while segmental PBT fell 42% QoQ. Auto parts revenue slipped 7% QoQ but PBT rose 178%, partially boosted by a MYR1.9m cost recovered from certain original equipment manufacturers (OEMs). Note that its associate contribution (largely made up of Perodua contributions) rose 40% QoQ despite a 8% QoQ decline in Perodua sales volumes, as we believe that the easing supply conditions have also led to easing costs.

• Outlook. We continue to forecast record sales of 320k for Perodua (4M23 97k units sold), this year – which is just slightly above the carmaker’s own 314k-unit target for FY23. During our recent ground checks, we gathered that there is still a minimum waiting period of 2-3 months for all Perodua models, with some ordered vehicles taking over six months to be delivered. With costs likely under control (thanks to the easing supply chain constraints), we think MBM’s associate contribution from Perodua should continue to drive the group’s earnings.

• Forecasts. We maintain our estimates, as results are in line.

• Our TP of MYR5 is based on 7x FY23F P/E (+0.5SD 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 BUY call, as MBM should be a proxy of Perodua’s potential blockbuster year, and for its attractive 10% FY23F dividend yield. Should FY23 results be in line with our expectations, there may be a likelihood of MBM forking out a special dividend.

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

• ESG framework update. As there is now greater focus on the E pillar due to critical climate change issues, we have tweaked our ESG weightage. Henceforth, we assign a weightage of 50% to the E pillar, followed by 25% each to the S and G pillars. Further details are in our 2 May thematic research note titled Envisioning a Better Future.

Source: RHB Research - 26 May 2023