Highlights/ Comments

• In view of the competitive environment and weakened consumer sentiment, management has set a lower sales target for FY15 at 96k units (Toyota and Lexus) from 103.6k units registered in FY14. Note that Toyota sales were relatively disappointing in Jan 2015 at only 4.1k units. We are relatively concern about Toyota’s earnings in FY15, from lower than expected sales volume and margins as well as the impact of strengthening US$.
• On the other hand, Perodua’s sales target for FY15 was set at 208k units (vs. 195.6k sales achieved in FY14), banking on the strong demand for Axia and facelifted MyVi model. By early Feb 2015, Axia has received 82k bookings and 36k units have been registered. Axia is expected to be exported to foreign markets in 2H15.
• Outlook for equipment is expected to be relatively stable, from on-going demand for heavy equipment in Myanmar for jade mining industry as well as development, which may cushion the slowing demand from other countries due to the slump in commodity prices.
• UMWOG is facing potential lower charter rates of 5-7%, as new contracts and existing contracts being (re) negotiated, in view of the slump in crude oil price (below US$60/bbl) affecting margins of the producer (including Petronas). Nevertheless, UMWOG remained upbeat on the continuation of charter contracts for its jack-up rigs.
• Other segment (including Valued Group Business) remained in the red due to provision, derivative losses and slower than expected turnarounds. The disposal of its India investments is expected to complete by end 1Q15, while its investment in WSP has been fully impaired. Management is targeting profitability in 2015 for the segment with better prospect for Arabian Drilling Services (Oman) and USTP (India).

Forecasts

• 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

• Unchanged.

Rating

HOLD

Positives

• 1) Control largest market share of Malaysia TIVwith 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 demandand charter rates for jack-up rigs; 2) Tightening of bank’s lending rules; and 3) Intense competition from rival automotive marques.

Valuation

Maintained HOLD with unchanged Target Price of RM10.75 based on SOP.

Source: Hong Leong Investment Bank Research - 2 Mar 2015