Results

• Reported core net profit of RM218.8m in 3Q14 and RM605.5m in 9M14, in line with HLIB’s RM771.5m (78.5%), but below consensus RM898.7m (67.4%). We expect weaker earnings in 4Q14 from automotive division.

Deviations

• None.

Dividends

• Announced second interim single tier dividend of 15 sen/share.

Highlights

Automotive: 3Q14 revenue improved 8.6% yoy due to higher Toyota sales volume (Vios was only launched in 4Q13 and Altis in 1Q14), contributing to higher PBT contributions yoy. However, we expect stiff competitive market in 4Q14, which may affect Toyota’s margin. Stronger contribution from Perodua Axia is expected to partly offset the decline in earnings from Toyota.

Equipment: 3Q14 PBT dropped 20.2% yoy due to lower sales mix of heavy equipments, as demand was affected by suspension in mining activities in Myanmar and drop in commodity prices in Papua New Guinea.

Oil & Gas: 3Q14 revenue improved 23.9% yoy and 6.5% qoq from contributions of new jack -up rigs (Naga 4 and Naga 5), resulting in stronger earnings contributions. We expect continued earnings growth in 4Q14 from the deliveries of Naga 6 and Naga 7.

Manufacturing & Engineering: 3Q14 reported lower losses before tax yoy mainly due to impairments in the previous corresponding 3Q13 (estimated at RM50m). Losses in 3Q14 was mainly due to CCD interest expenses by India subsidiaries and lower local sales volume (automotive parts and components).

Risks

• Prolonged tightening of banks’ HP rules.
• Slowdown in the Malaysian economy affecting car sales.
• Global automotive supply chain disruption.
• Appreciation of US$.
• Plunge in crude oil price and slowdown in O&G exploration.

Forecasts

• We have fine-tuned our model by adjusting earnings for FY14-16 by +2.7%, -0.8% and -2.1% respectively.

Rating

HOLD

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) Slump in crude oil prices affecting demand and charter rates for jack -up rigs; 2) Tightening of bank’s lending rules ; and 3) Intense competition from rival automotive marques.

Valuation

• Post earnings adjustments, we cut our target price to RM11.30 (previously RM11.43) based on SOP, with unchanged Hold recommendation.

Source: Hong Leong Investment Bank Research - 27 Nov 2014