Results

• Below Expectations - Reported core profit of RM1.6m in 1Q16, which was only 0.7% of HLIB’s FY16 expectation and 0.4% 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

• None.

Highlights

• Automotive: 1Q16 earnings weakened further on weaker Toyota, Lexus and Perodua sales volume, after price hikes effective Jan 2016. Management cut sales target for Toyota to 80k units (from 85k units) and Perodua to 200k units (from 216k units) for FY16, attributed to the weak market sentiment. New launches for FY16 include Toyota Hilux, Fortuner, Innova, Vios (upgrade) and Perodua Sedan.

• Equipment: Continued to be affected by weak business sentiment on mining and construction in the quarter (especially domestic market). Myanmar jade mining industry is clouded by uncertainties concerning new policies by the new government.

• Oil & Gas: 1Q16 earnings reflected the ongoing weak demand for jack-up rigs due to the low oil price situation. UMWOG suffered from depressed utilization rates. Outlook for upcoming quarters remains bleak as Naga 6 contract is expected to end in 2Q16.

• Manufacturing & Engineering: 1Q16 earnings was affected by weak domestic automotive market as well as weak consumer sentiment. The upcoming new assembly plant for fan case to supply to Rolls Royce is expected to contribute positively in 2018.

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 earnings for FY16E by 65.3% and FY17E by 12.3%, mainly drag by lower car sales assumption and loss making UMWOG, but increase FY18E by 2.4% on new contributions from MRO manufacturing.

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; 3) Intense competition from rival automotive marques; and 4) Weak RM.

Valuation

• Maintain SELL recommendation with lower SOP based TP: RM4.38 (from RM5.50) after cutting earnings estimates and lowered P/E multiples on weakened market sentiment.

Source: Hong Leong Investment Bank Research - 25 May 2016