Results

Although we expect stronger earnings in 4Q13 (on higher car sales), we deemed 9M13 result as below expectations. Reported 3Q13 core net profit of RM192.0m and 9M13 at RM642.3m vs. HLIB’s RM948.8m (67.7%) and consensus RM997.1m (64.4%).

Deviations

Weaker than expected margin for automotive segment, engineering and manufacturing segment and others segment (previously part of oil & gas).

Dividends

Announced interim single tier dividend of 15 sen/share and special dividend of 10sen/share.

Highlights

Automotive: 3Q13 revenue dropped by 5.4% qoq and 19.9% yoy on lower Toyota sales, while PATMI deteriorated further by 8.4% qoq and 28.8% yoy as Toyota suffered margin compressions on aggressive promotional campaigns. We expect sales volume to improve in 4Q13 on maiden contribution of new Vios (launched 1 Oct), which has received over 16,000 bookings.

Equipment: 3Q13 revenue slide further by 7.5% qoq on weak demand from construction, plantation and mining sector slow down. We expect further weakening in FY14.

Oil & Gas: 3Q13 revenue jumped 40.0% qoq from full quarter contribution of Naga 4. Expect stronger earnings in coming years, when it increases number of rigs. However, UMW will recognize lower effective share of earnings from UMW O&G post listing on 1 Nov.

Manufacturing & Engineering: 3Q13 revenue was stable qoq, but earnings were affected by asset impairments in the quarter and weakened Indian Rupee (Forex losses). The signed 10 year contract with Repsol will further enhance its earnings.

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 7.7%, and FY14-15 by 4-5%, after assuming lower average car price and margins (due to Vios lower pricing vs. other models as well as higher marketing and distributional cost).

Rating

Hold 

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 Hold with lower Target Price of RM12.25 based on SOP.

Source: Hong Leong Investment Bank Research - 22 Nov 2013