Results

• Below Expectation - Reported core net profit of RM71.1m in 3Q15 and RM314.1m in 9M15, achieved only 75.9% of HLIB’s FY15 expectation and 60.8% of consensus. We expect continued worsen business environment for automotive and O&G segments in 4Q15.

Deviations

• Mainly dragged by lower margins on lower sales volume (automotive and manufacturing divisions), lower charter rates and utilization rates (O&G), and higher operational costs (inputs and marketing expenses).

Dividends

• None. As expected given the deteriorated automotive outlook.

Highlights

• Automotive: 3Q15 earnings deteriorated further qoq on lower sales volume and higher input costs (weakened MYR) and sales and promotional expenses to boost sales volume for Toyota on the back of stiff competition environments. Perodua contributions during the quarter also deteriorated on higher imported CKD costs on weakened MYR.

• Equipment: 3Q15 earnings improved on higher demand for heavy equipment from Myanmar and Papua New Guinea. Overall earnings improved on higher sales volume, margins and higher translated US$ denominated transactions.

• Oil & Gas: 3Q15 earnings reflect the downturn of demand for jack-up rigs. UMWOG suffered from depressed utilization rates and time charter rates as well as higher expenses from Naga 7. Excluding forex gain of RM36.4m, the segment to contribute losses in 3Q15.

• Manufacturing & Engineering: Barely breakeven in 3Q15, due to lower demand for autoparts and lubricants in view of slowdown in automotive sector in Malaysia and China.

• Others: Continued losses, indicating longer than expected turnaround, given drop in crude oil prices.

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 earnings for FY15-17 by 6.4-16.8% in view of the weaker market demand and higher costs structures.

Rating

SELL

Positives

• 1) Control largest market share of Malaysia TIV with leading brand - Toyota, Lexus and Perodua; and 2) Investing into new business segment.

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

• Maintained SELL recommendation with lower SOP based TP: RM6.55 (from RM6.85) after cutting earnings estimates and lowered P/E multiples on weakened market sentiment.

Source: Hong Leong Investment Bank Research - 27 Nov 2015