MBMR is optimistic for another record year for Perodua vehicle sales, topping the 330k units sold last year, echoing MAA's revised TIV target of 800k units. Its newest brand under its stable, Jaecoo, has received overwhelming responses and is expected to boost volume and distribution margins within the next three years. We maintain our forecasts, TP of RM6.80 and OUTPERFORM call. The stock offers attractive dividend yield of about 8%.

We came away from MBMR's 3QFY24 results briefing yesterday feeling upbeat. The key takeaways are as follows:

1. MBMR indicated that based on the current monthly TIV trend, Perodua vehicle sales could exceed earlier guidance by Perusahaan Otomobil Kedua Sdn Bhd which is 2024 vehicle sales of 330k units (matching that of 2023) and vehicle production of 334k units driven by the strong demand for affordably-priced vehicles currently. This sentiment is consistent with MAA's revised TIV guidance of 800k units (higher from earlier target of 765k units). Perodua has the highest localisation rate of 95% in the automotive industry. It is currently running at maximum capacity with minimal supply-chain disruptions. Meanwhile, order backlog of Perodua vehicles remain consistent at over 100k units per month due to the combination of steady new order registration and consistent production capacity.
   
   Plants of Perodua Manufacturing (PMSB) and Perodua Global Manufacturing (PGMSB) have a combined capacity of 320,000 units. Currently operating in two shifts, there are plans to boost production by lifting productivity and increasing overtime. We are keeping our Perodua vehicle yearly sales assumption of 350k units in both FY24 and FY25 backed by strong sustained demand in the affordable segment, attractive new launches (all-new D66b in early 2025, and its EV by end-2025), and a downtrading trend by mid-market buyers.
2. MBMR's newest brand under its stable, Jaecoo, a fast-growing China car brand focusing on premium SUVs, has started its first delivery in August 2024 (30 CBU units per month, scaled up thereafter based on demand). It has opened its first 1S outlet in August 2024 at Menara MBMR (capex below RM1m), followed by a 4S outlet in Segambut, in 2025 (capex around RM8m) and plan to explore a 3S outlet near Menara MBMR. It will distribute J7 (44 units delivered in the 3QFY24), J7 PHEV (in early 2025), J6 EV (from 2024 or 2025), J5 hybrid and EV models (2025), Jaecoo J9 in EV and PHEV forms (from 2025 or 2026). It hopes to sell 10k unit per year after setting-up local CKD production which is expected within the next three years (comparable to sister brand Chery's record).
3. It guided for stronger operating results ahead on year-end promotions, fulfilment of Perodua backlogs, and lower cost for auto parts (improved MYR against USD, THB and YEN). It also guided that dividend pay-out would relatively be the same as previous years (NDPS at 54 sen), but does not rule out a higher pay-out depending on operating results in the upcoming quarter. Thus, we increase our NDPS forecast to 55 sen from 45 sen.

Forecasts. Maintained.

Valuation. We also maintain our TP of RM6.80 based on PER of 8x on FY25F EPS which is at a discount to the auto sector's average forward PER of 11x given its smaller scale, and business model which is skewed toward auto dealerships compared to other players which are more into auto manufacturing. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 4).

Investment case. We continue to like MBMR for: (i) its strong earnings visibility backed by an order backlog of Perodua vehicles of over 100k units (almost half of its CY24 target sales of 340k units), (ii) being a good proxy to the mass-market Perodua brand given that it is the largest dealer of Perodua vehicles in Malaysia, as well as its 23% stake in Perusahaan Otomobil Kedua Sdn Bhd, the producer of Perodua vehicles, and (iii) its attractive dividend yield of about %. Maintain OUTPERFORM.

Risks to our call include: (i) consumers cutting back on discretionary spending (particularly big-ticket items like new cars) amidst high inflation and subsidy rationalisation, (ii) persistent disruptions (including chip shortages) in the global automotive supply chain, and (iii) persistent high cost for materials in auto parts manufacturing.

Source: Kenanga Research - 27 Nov 2024