Investment Highlights

• We maintain BUY but revised our FV to RM2.10/share (from RM2.19) as we change the valuation method from PB to PE given the continuity in earnings. We raised our FY18/19/20 projections by 34%/44%/44% with the assumption of lower operating costs and stronger overseas earnings. Our new FV is based on an FY19F PE of 13.0x (previously: PBV of 0.5x).

• TCM’s YTD core net profit of RM69mil exceeded expectations, meeting 103% of our FY projection and 125% of consensus.

• TCM’s 3QFY18 benefited from the tax holiday and popularity of the Serena MPV. Core net profit of RM35mil (up 73% QoQ, 121% YoY) was anchored to the spike in Nissan sales in Malaysia and a turnaround for its lossmaking operations in Vietnam. Recall that Vietnam was previously the last of the group’s Indochina operations to be in the red due to poor utilization rates.

• TCM’s YTD core net profit of RM69mil was a massive swing from the RM93mil loss in the previous corresponding period, as it stayed in the black for three straight quarters following two years in the red.

• This reflected its success from pursuing margins rather than volume: YTD sales in Malaysia were flat YoY but domestic revenue improved 13% and EBITDA jumped 136% as EBITDA margin rose 4ppts to 7%.

• Inventory/inventory turnover days (RM909mil/221 days) and net debt/gearing (RM805mil/0.3x) both fell below the RM1bil threshold to see their best level in over two years. This led to a better operating cash flow and lower net finance costs for the YTD period, consequently playing a small part in taking TCM’s PBT margin into positive territory.

• We project a FY18/FY19 sales growth of 2%/5% premised on an average of 2.3K/month sold in the final quarter of FY18 and possible additions next year.

• The Serena MPV accounts for a third of Nissan monthly sales and has only been around for six months. As the momentum from this slows, we believe new launches should come to target Nissan’s other segments: passenger cars and SUVs. TCM should adopt a similar strategy and prioritize on margins rather than competing for volume.

Source: AmInvest Research - 28 Nov 2018