Results

• Below Expectations - Reported core net profit of RM172.6m in 1Q15, which is only 20% of HLIB’s RM865m and 19% of consensus’s RM907.2m for FY15.

Deviations

• Lower than expected contribution from automotive (Toyota) and O&G segments

Dividends

• None.

Highlights

• Automotive: 1Q15 revenue dropped 24.5% yoy due to lower Toyota sales volume (stiff competitions and weakened consumer sentiments). Margins further deteriorated from RM depreciation against US$ (higher input costs), contributing to lower PATAMI contributions yoy. We expect continued stiff competitions within the sector, affecting Toyota earnings. Nevertheless, earnings downside may be partially mitigated by stronger contributions of Perodua.

• Equipment: 1Q15 revenue improved 50.1% yoy attributed to improved sales of industry (uptake in orders in Malaysia prior to GST and in Singapore on government’s tax incentive) and heavy equipment (mainly deliveries to Myanmar jade mining), which enhanced the PATAMI by 103.4% yoy. However, we expect lower contribution for the following quarters.

• Oil & Gas: Despite higher revenue, 1Q15 PATAMI declined by 18.5% yoy, on discounts offered to contracted charter rates in view of the lower oil price environment. The sector is expected to remain lackluster as long as oil price below US$80/bbl.

• Manufacturing & Engineering: Margins remained relatively weak in 1Q15 with PATAMI of only RM1.3m, due to intense competitions and weak demand (automotive 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 cut our earnings for FY15-17 by 7.3-22.5% to reflect the lower contribution of automotive and O&G segments.

Rating

SELL

Positives

• 1) Control largest market share of Malaysia TIV with leading brand - Toyota, Lexus and Perodua; and 2) 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 the earnings cut, we downgraded the counter to SELL (from Hold) with lower target price of RM9.44 (from RM10.75) based on SOP.

Source: Hong Leong Investment Bank Research - 27 May 2015