Results

Reported core net profit of RM220.4m in 2Q13 and RM450.3m in 1H13 vs HLIB’s RM997.3m (45.1%) and consensus RM1,075m (41.9%), slightly below expectations, although we expect stronger 2H13.

Deviations

Weaker than expected margin for automotive division.

Dividends

Announced interim single tier dividend of 10 sen/share.

Highlights

Automotive: 2Q13 revenue increased by 7.5% qoq on higher Toyota sales, but reported PATMI of -2.3% qoq despite higher contribution from Perodua associate, as Toyota faced margin compressions on aggressive promotional campaigns. We expect sales volume to disappoint the market and potentially further margin erosion on weakened MYR against US$ (all ckd imports are denominated in US$).

Equipment: 2Q13 revenue slide further by 7.3% qoq on softer demand from construction sector (project delays) and plantation and mining sector (weak commodity prices). We expect further weakening in 2H13.

Oil & Gas: 2Q13 revenue dropped 18.0% qoq on the expiry of Hakuryu 5 contract in Jan 13. Expect stronger earnings in 2H13 from full contribution of Naga 1 and Naga 4 as well as higher daily operating rate for Naga 2, with higher translated earnings from US$ appreciation. 2Q13 earnings was bumped up by property disposal gain of RM30m.

Manufacturing & Engineering: 2Q13 revenue improved marginally by 6.1% qoq and 3.2% yoy due to higher demand for lubricant products, but was hit by the depreciation of IDR against US$, translating into losses. Management expects earnings to improve further in 2H13 from rising demand for Repsol and Pennzoil products.

Risks

• Prolonged tightening of banks’ HP rules.
• Slowdown in the Malaysian economy affecting car sales.
• Global automotive supply chain disruption.

Forecasts

Cut earnings for FY13 by 6.4%, and FY14-15 by 11-12%, after assuming lower margins from the weakened MYR, and potentially weaker economy growth (consumer demand).

Rating

SELL

Positives –

• Control largest market share of Malaysia TIV with leading brand - Toyota, Lexus and Perodua.
• Turnaround of Oil & Gas division, as well as strong sales from Equipment division.
• Expanding reach of Manufacturing & Engineering division into fast growing China and India.

Negatives –

• High crude oil prices affecting margins of its oil based products i.e. lubricants.
• Tightening of bank’s lending rules.

Valuation

Maintained SELL with lower Target Price of RM11.26 based on SOP.

Source:Hong Leong Investment Bank Research - 2 Sep 2013