This article first appeared in The Edge Financial Daily on February 28, 2020

MBM Resources Bhd
(Feb 27, RM3.82)
Maintain buy with an unchanged target price of RM4.55: MBM Resources Bhd reported a core net profit of RM51 million for its fourth quarter of financial year ended Dec 31, 2019 (4QFY19), bringing FY19 core earnings to RM193 million, after normalising for: i) RM25 million gain on disposal of a 22%-stake in Hino; ii) RM11.9 million gain on disposal of properties; and iii) RM9.5 million write-off of one-off cost related to the motor division. The core FY19 earnings were in-line, accounting for 102% of both our and consensus estimates, though this should be taken in context with the numerous consensus upgrades throughout FY19.

An interim dividend of seven sen per share was declared bringing FY19 interim dividends to 13 sen per share, some 117% higher compared to FY18 interim dividends. For FY18, MBM also proposed a final dividend of six sen per share (in April), which brought FY18 total dividends to 12 sen per share. A final dividend for FY19 has yet to be announced but we believe is very likely. MBM’s FY19 entailed a free cash flow yield of 16% while the interim dividends so far represent only a 3.3% yield and a 23% payout relative to its reported earnings per share. As such, we stick to our forecast of FY19 total dividends of 23 sen per share (45% payout) which translates into a generous yield of 6%. Earlier in FY19, MBM adopted a new dividend policy of a minimum 60% payout at the holding company level (estimated 40%-45% payout at group level).

The group’s core net profit declined 23% year-on-year to RM51 million for 4QFY19. This was mainly due to an exceptionally strong base for 4QFY18 which was driven by the fulfilment of back orders after the production disruption for the MyVi production line was resolved in 3QFY18. For the auto parts unit, the strong 4QFY18 base was also driven by fulfilment of back orders during the goods and services tax-free period.

Its gross debt levels reduced further to RM36 million for 4QFY19 (from RM148 million for 1QFY19) as the group pared down debt related to OMIA (OMI Alloy Sdn Bhd) utilising partly its RM74 million proceeds from the sale of a 22%-stake in Hino in 2QFY19. MBM’s net cash position is underpinned. Group net cash of RM228 million as of end-4QFY19 accounts for some 15% of MBM’s market capitalisation.

At just seven times financial year ending 2020 forecasted (FY20F) earnings coupled with an attractive 6% yield, MBM remains a cheap proxy to Perusahaan Otomobil Kedua Sdn Bhd’s (Perodua) volume expansion and the spillover on its parts manufacturing and Perodua dealership units. Key catalysts are: i) launch of Perodua’s new B-segment SUV for FY20F; ii) recovery in industry production driven by new national car launches; iii) sale of OMIA assets; and iv) higher dividends on the back of an underleveraged balance sheet. Risks to our call are weaker-than-expected demand and a weak ringgit. — MIDF Research, Feb 27