MBM poised to ride on recovery in auto sector
New launches, including the Perodua Aruz, bring excitement
MBM Resources Bhd may be one of the companies that is best placed to ride on the anticipated upswing in the automotive industry given its exposure as a shareholder of Perusahaan Otomobil Kedua Sdn Bhd (Perodua).
Excitement appears to be returning to the automotive industry as new car models are launched and the Chinese New Year may see demand for new cars rising.
The recent launch of the Proton X70 sport utility vehicle (SUV) has reignited some interest in the industry and the second national carmaker Perodua will also be unveiling its own SUV – the Aruz.
The industry generally took a backseat for last year and the year before as the ride-sharing phenomenon took the limelight following aggressive promotional campaigns. There was also the constant highlight on the efforts to increase rail infrastructure in the country moving forward.
All the concerted efforts also led to a belief that there would not be a necessity to own cars.
It appears that interest could be returning after the consolidation of the ride-sharing industry following the Grab-Uber merger in South-East Asia early last year that had likely reduced competition and the increased government regulations that may give further upward pressure on ride fares.
MBM’s share price appears to be reflecting this excitement as investors bet that the new car launches will benefit the company.
MBM, which is a 22.6% shareholder of Perodua, is also involved in other segments of the automotive industry namely motor trading and the manufacture of automotive parts.
Its shares last traded at its near seven-months high at RM2.41 yesterday with heavy volume indicating returning interest.
Maybank Investment Bank Research, in a recent report dated Jan 3, says MBM has the best exposure to Perodua noting that the share price rally has some legs this time around.
When it released this report, it also increased its price target for the counter to RM4.50 retaining its “buy” call which indicates an 86.7% upside from present prices.
“Despite a recent climb in share price (+17% in the last one month), MBM is still very much undervalued as its 22.6% effective stake in Perodua alone is worth RM2.2bil (based on 13 times financial year ending Dec 31) price to earnings ratio to our revised Perodua earnings of RM737mil in FY19 which is 2.5 times that of MBM’s current market capitalisation,” says the research house.
Anticipating the launch of the Perodua Aruz, Maybank Investment says it is including contribution from this model of about 2,000 units monthly for FY19 and 1,500 units per month in FY20 into its earnings estimation for the company.
This is slightly lower compared with Perodua’s own estimated target of 2,500 units of the Aruz monthly.
“Partially offset by expectation for lower sales of the other models such as the Myvi, Bezza and Alza for revised assumptions, we raise MBM’s FY19/20 earnings forecasts by 8%/6% respectively. Eyes will be on the booking and delivery of this model, to be revealed frequently in the next few months,” it says.
“A consistent outperformance could present further upside to our earnings forecasts,” it notes.
It also says Perodua has already achieved its 2018 sales target of 209,000 units in the 11th month of its FY18 and is poised to exceed its 220,000 units (+7% year-on-year) assumption by 3%-5%.
Maybank Investment is expecting the company to report further sequential earnings growth in the fourth quarter of FY18 from an already solid third quarter.
“This would help MBM close the year on a new high; beating its 10-year-high of RM142mil net profit that was set in 2010. For 2019, the introduction of the new Perodua Aruz and Toyota Vios and Yaris models should also offer further opportunities for MBM’s alloy-wheel plant,” it says.
The consensus rating on Bloomberg is bullish as it showed all nine research houses covering the company had “buy” calls on the counter.
Interestingly, the buy calls are aplenty despite a cautious outlook presented by MBM in its third quarter for FY18’s note.
In the notes to its financial statements, the company had said the operating environment for the rest of the financial year would remain challenging as most consumers’ buying interest have been fulfilled during the goods and services tax (GST)-holiday period.
“As anticipated in the earlier quarter, our vehicle sales benefited from the GST tax-holiday period which ended on Aug 31, 2018. The higher demand was, however, suppressed by insufficient stocks to meet market demand, as well as the reintroduction of sales and service tax in September which dampened consumers’ interest,” MBM says in its note.
It says the unexpected supply disruption further constricted the sales volume in September 2018, although the issue was promptly resolved early into the fourth quarter.
The third quarter for the FY18 showed its net profit rising by more than three-fold to RM38.11mil from RM7.33mil in the same quarter a year ago.
While revenue for the quarter rose slightly to RM472.48mil from RM466.81mil in the same quarter a year ago.
MBM attributed the increased profits to improved results from the manufacturing of auto parts and its associates while the previous year’s quarter also saw a one off goodwill impairment of RM10.8mil compared with zero impairments in the recent quarter.
With MBM’s exposure to two of the brands that continues to hold its established reputation in the automotive space: Toyota and Perodua, MBM is poised to ride on the recovery in the industry even as car launches ramp up with the upcoming Chinese New Year celebrations.
Solid performance: A teaser image of the new Perodua SUV. Maybank Investment is expecting Perodua to report further sequential earnings growth in the fourth quarter of FY18 from an already solid third quarter.