Results

In Line – Reported core net profit of RM211.8m in 1Q14, achieving 26.3% of HLIB’s FY14 forecast and 22.4% of consensus.

Deviations

None.

Dividends

None.

Highlights

Automotive: 1Q14 revenue increased by 6.7% yoy on higher sales of Toyota (Vios and Altis) and Lexus, which drove up PBT margin for the quarter. The segment is facing intense competitive pressure from other OEMs (i.e. Honda, Nissan, Mazda, VW etc.), which may affect margins (due to high marketing and distributional cost) in the coming quarters.

Equipment: 1Q14 revenue dropped by 9.3% yoy, as demand weakened from Myanmar and Papua New Guinea mining sector. Furthermore, imported equipment was affected weakened RM. The segment is expected to remain challenging for remaining year.

Oil & Gas: Continued to report yoy earnings growth in 1Q14, contributed by NAGA 1, NAGA 2 and NAGA 4. Expect sustainable earnings growth as UMWOG takes more deliveries of Jack-Up Rigs up to 2015, leveraging on the growth trend in regional O&G exploration activities.

Manufacturing & Engineering: 1Q14 revenue improved by 2.7% with sustained margins, on better sales from India operation. Malaysia and China operations are expected to sustain growth, while India is only expected to recover in 2H14 post elections.

Others: The segment which includes Valued Business remained a drag to group earnings, with lower revenue and larger yoy losses in 1Q14 (not comparable to 4Q13, as the quarter incurred huge losses from weakened Indian Rupee and derivatives). These businesses are currently under restructuring efforts.

Risks

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

Forecasts

Unchanged.

Rating

BUY

Positives – 1) Control largest market share of Malaysia TIV with leading brand - Toyota, Lexus and Perodua; 2) Strong growth of Oil & Gas division; and 3) Expanding reach of Manufacturing & Engineering division into fast growing China and India.

Negatives – 1) High crude oil prices affecting margins of its oil based products i.e. lubricants; 2) Tightening of bank’s lending rules; and 3) Intense competition from rival automotive marques.

Valuation

Maintained BUY with unchanged Target Price of RM12.55 based on SOP.

Source: Hong Leong Investment Bank Research - 26 May 2014