Stronger earnings seen for MBM on higher Perodua TIV forecasts

This article first appeared in The Edge Financial Daily, on January 17, 2019.
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MBM Resources Bhd
(Jan 16, RM2.51)
Maintain buy with a higher target price (TP) of RM3.80:
In line with our sector report yesterday, we raise MBM Resources Bhd’s financial year 2018/2019 forecast (FY18F/FY19F) earnings by 16%/19% to RM148 million/RM165 million — we are now 10%/16% above consensus.

The upward revision is to reflect higher Perodua total industry volume (TIV) forecasts for FY18F and FY19F; the former, given stronger-than-expected sales over the tax holiday period and the latter, driven by Perodua’s new sport utility vehicle (SUV) model, the Aruz.

Our TIV forecast for Perodua was raised to 227,000/241,000 units for FY18F/FY19F representing 11%/6% year-on-year (y-o-y) growth respectively.

The Aruz plugs an important gap in Perodua’s model mix after having been absent from the SUV segment since 2009.

The Aruz is now Perodua’s highest priced model — previously, the Alza was its highest, priced at RM51,490 to RM62,690.

Given the large approximately RM10,000 gap in price points within a price sensitive segment, we think the Aruz is unlikely to cannibalise the Alza in a big way.

The Aruz also fills a vacuum in the less than RM80,000 SUV segment — the Aruz would be the cheapest seven-seater SUV from the mainstream brands to be available in the market, giving Perodua a strong advantage.

The Haval H1 (five-seater SUV from a Chinese brand), although entailing cheaper pricing of RM59,000 to RM72,000, has not really been selling in the market and is not a direct competitor given its much smaller size.

MBM is a cheap play into Perodua’s structural TIV growth from the Aruz, trading at just six times FY19F earnings.

Furthermore, MBM provides earnings leverage into Perodua as Perodua accounts for more than 90% of MBM’s earnings.

The group’s dealership unit, particularly 51%-owned Daihatsu Malaysia Sdn Bhd (DMSB), is a key beneficiary of Perodua’s TIV expansion as DMSB is the largest Perodua dealership in the country, accounting for about 10% of Perodua TIV.

MBM’s parts manufacturing units are also beneficiaries from supplies to the Aruz and, potentially, Proton X70. National cars typically entail high local content of 70% to 95% versus 40% to 60% for non-nationals.

We reaffirm our “buy” call on MBM and raise our sum-of-parts derived TP to RM3.80 from RM3.15 previously. MBM is now our top sector pick.

Key catalysts include a strong 6% y-o-y Perodua TIV expansion (FY19F) on the back of the Aruz to fill up a vacum in Perodua’s model mix, as well as a recovery in industry production driven by the new national car launches.

Risk to our call is weaker-than-expected demand for the Aruz and a weak ringgit. — MIDF Resarch, Jan 16