• Maintain BUY and MYR5 TP, 45% upside. After attending MBM Resources’ 1Q23 analyst briefing, we feel reassured over its ability to chalk new highs in FY23, largely driven by its 20%-owned Perodua. Management is confident of Perodua’s ability to achieve its 314k unit sales target for the year, supported by the marque’s current c.190k order backlog. While management has flagged a resurgent chip shortage, this should not derail Perodua’s production levels. As such, MBM’s earnings should translate into a handsome c.10% FY23F yield.

• More colour on 1Q23 results. The 40% QoQ surge in the associate contribution was largely due to Perodua's lower costs, as it faced higher tax expenses in 4Q22 from the one-off prosperity tax. The associate results (+MYR20m QoQ) were also partially boosted by a lump sum cost recovery of MYR1.9m accumulated from prior quarters. Management has indicated that the cost-recovery mechanism should now be recurring in subsequent quarters. Perodua managed to deliver most of its sales and service tax- (SST) exempt orders, save for c.7k units.

• No slowdown in orders. According to management, Perodua has taken in c.40k orders in May, more than the 30k-35k monthly norm – which points to resilient demand. They shared that Bezza and Myvi account for slightly more than half of Perodua's total bookings. This mirrors what Perodua’s 38%-owner UMW's (UMW MK, BUY, TP: MYR5) management has shared – that Bezza, Myvi and Axia make up c.70% of Perodua's recent sales.

• Who is buying all these cars? Given that the lowest-priced Perodua models are the most in demand, we think that some buyers could be first- time buyers and/or are more price sensitive. Perodua has also been gaining market share over other marques, recording a 41% share vs the 2021-2022 average of 38%. We suspect that there is some element of downtrading amidst the elevated cost of living.

• Resurgent semiconductor issue? Management has indicated that one of Perodua's tier-1 infotainment system suppliers is facing a semiconductor shortage again. UMW's management did not highlight such an issue. From our check with Betamek (BETA MK, NR) – which supplies c.60% of Perodua's infotainment systems – we found that this company has not been seeing resurgent chip shortages. While further details are scarce at present, we will continue to monitor the issue, and are reassured that said shortage is not expected to derail Perodua’s 314k sales target.

• Still BUY, no change to our forecasts and MYR5 TP, which is based on 7x FY23F P/E (+0.5SD from the 5-year mean). Our TP includes a 4% ESG discount. We maintain our BUY call, as MBM’s sturdy net profit – boosted by strong Perodua results – should translate to a c.10% FY23F yield. This sector-high dividend yield should provide investors safety amidst challenging market conditions. Key downside risks include lower-than- expected orders and deliveries, higher-than-expected costs, and resurgent supply chain issues.

Source: RHB Research - 29 May 2023