Results

• Below Expectations - Reported core net losses of RM59.8m in 4Q15. Nevertheless, full year FY15 was still a profit of RM254.3m, achieving only 65.7% of HLIB’s FY15 expectation and 62.3% of consensus.

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

• Declared second net interim dividend of 10sen. Total net dividend was 20sen (2.9% dividend yield), below our expectation of 25sen.

Highlights

• Automotive: FY15 earnings deteriorated 36.8% yoy 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 contribution was also affected by lower revenue mix and higher imported CKD costs on weakened MYR.

• Equipment: FY15 earnings stayed relatively flat at -3.3% yoy as demand normalized from Myanmar and Papua New Guinea. However, the slowdown in economy and low commodity prices in 2016 are expected to affect the demand for heavy equipments.

• Oil & Gas: FY15 earnings reflect the downturn of demand for jack-up rigs. UMWOG suffered from depressed utilization rates and time charter rates. The unit recognized impairments and writedowns of RM349.8m during 4Q15 due to unfavorable outlook for the demand. We do not discount possibility of further impairments in 2016.

• Manufacturing & Engineering: FY15 earnings relatively stable with the stronger demand from China offset the slowdown in Malaysia.

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 cut FY16-17 earnings by 50.2% and 40.5% respectively in view of the weaker market demand and higher costs structures. Introduced FY18 earnings at RM426m.

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: RM5.50 (from RM6.55) after cutting earnings estimates and lowered P/E multiples on weakened market sentiment.

Source: Hong Leong Investment Bank Research - 26 Feb 2016