This article first appeared in The Edge Financial Daily on November 26, 2018

MBM Resources Bhd
(Nov 23, RM1.91)
Maintain buy with an unchanged target price (TP) of RM3.20: MBM Resources Bhd’s third quarter ended Sept 30, 2018 (3QFY18) results were ahead of expectations. The group reported core net profit of RM36 million (excluding a RM1.9 million one-off gain on disposal of property) for its 3QFY18, which brought cumulative nine months ended Sept 30, 2018 (9MFY18) core earnings to RM104 million. This accounted for 95% and 84% of our and consensus financial year 2018 (FY18F) respectively.

Despite weak Perodua invoiced volumes in 3QFY18 (-10% quarter-on-quarter [q-o-q]/-1% year-on-year [y-o-y), associate earnings were supported by stronger volumes from Hino (+63% q-o-q / +45% y-o-y). This is in contrast to our earlier expectations of a weak 3QFY18 arising from the MyVi production disruption in September (which was only rectified in October). We suspect Hino’s strength could be due to fleet sales (as enterprises take advantage of the tax holiday period) and may not be sustainable.

MBM’s dealership division registered a 5% q-o-q revenue contraction while earnings would have contracted if not for a one-off gain on property disposal of RM1.9 million. Despite strong demand in 3QFY18, there was a shortage of stock supply, which was made worse in September due to the MyVi supply issue. Losses from MBM’s parts manufacturing division narrowed to RM1.3 million in 3QFY18 from RM4 million in second quarter ended June 30, 208 (2QFY18).

TIP (total industry production) improved significantly in 3QFY18 (+11% y-o-y / +12% q-o-q) but this strength is likely to be temporary as production was artificially boosted during the tax holiday period. Underlying losses from the alloy wheel division could narrow going forward as contract manufacturing arrangement with China’s Citic Dicastal Co Ltd takes off, targeted in 4QFY18.

We raise our FY18F (forecast) and FY19F earnings by 17% /10% to reflect: i) higher Hino forecasts mainly for FY18F; ii) higher Perodua total TIV at 216,000 units, as the year-to-date October TIV of 187,731 units looks likely to exceed our earlier projection of 209,000 units (FY18F), which was in line with management’s forecast.

Perodua maintained its 2018 forecast of 209,000 units in anticipation of weakness from September onward after the sales and service tax was reintroduced. We think the weakness is temporary and beyond 2018, possibly improved consumer spending power could drive a structural improvement in demand. More importantly, Perodua is scheduled to launch its sport-utility vehicle model by year end, which plugs an important gap in its model mix. — MIDF Research, Nov 23