• Keep BUY and MYR5 TP, 32% upside. 4Q22 earnings fell short of our forecasts, partially due to softer-than-expected associate contribution, suggesting potential cost pressures at 20%-owned Perodua. Looking ahead, we think the recent launch of the second-generation Perodua Axia should continue to add to Perodua’s existing 220k orders, driving it towards our 320k unit sales estimate. We like MBM as a proxy to Perodua’s strong FY23, and for its attractive c.10% FY23F yield.

• FY22 earnings fell short of our expectations, making up only 88% of full- year forecasts. The results met Street’s expectations. The deviation from our estimate was mainly due to weaker-than-expected associate contribution. Despite the 23% QoQ increase in Perodua’s volumes, MBM’s associate contributions only rose 4%, suggesting lower-than-expected Perodua margins – potentially due to cost pressures. MBM’s second interim DPS of 6 sen and special DPS of 15 sen brought FY22 DPS to 37 sen, above our 32 sen estimate.

• Results highlights. QoQ, MBM’s motor trading revenue rose 7%, while the segment’s operating profit was up 17% due to a 3ppts margin expansion. Its auto parts manufacturing, on the other hand, saw an 8% QoQ decline in revenue and 57% decline in operating profit, as its margin more than halved to 3.1% from 6.6% – we suspect this could be a result of higher input costs and/or the clearing of old stocks.

• Outlook. In FY23, we think Perodua’s potentially strong volumes could drive MBM’s earnings. After selling 282k units in 2022, Perodua is targeting 314k units this year, on the back of 330k units of production. Supported by its existing 220k orders in hand, we estimate Perodua will sell 320k units in 2023. In recent years, MBM’s associate contribution (which mostly comprises of Perodua) has made up between 60% and 73% of PBT. Due to our expectations of a strong performance from Perodua, we estimate the associate contribution will be at 75% of PBT in FY23.

• Forecast. We maintain our FY23F-FY24F earnings, as we had previously accounted for softer FY23F Perodua margins, due to the carmaker’s absorption of high input costs. We introduce FY25F earnings, implying a 20% YoY decline, premised on the potential implementation of the excise duty reform in 2025, which would be negative for car sales.

• Maintain BUY and MYR5 TP (includes a 4% ESG discount). We continue to like MBM as a proxy to Perodua’s potentially blockbuster year, and for its attractive FY23F dividend yield. Should FY23 perform as per our expectations, we think more special dividends could be on the table.

• Key downside risks include lower-than-expected orders and deliveries, and resurgent supply chain constraints.

Source: RHB Research - 21 Feb 2023