TCM’s 1H18 core profit of RM34.1m was above our expectation and consensus. Better performance was mainly due to higher sales volume (driven by zerorisation of GST), improved sales mix and better RM position since early 2018. The board has proposed an interim dividend of 2.0 sen/ share. We raised FY18, FY19 and FY20 earnings to RM77.9m, RM114.0m and RM144.6m respectively after increasing domestic sales volume assumption. We maintain our BUY rating with higher TP of RM2.18 based on 0.5x P/NAV.

2Q18 results above expectations. TCM reported core PATAMI of RM20.2m for 2Q18 and RM34.1m for 1H18, achieving 81.8% of HLIB’s FY18 forecast and 76.1% of consensus. The better than expected core PATAMI was due to higher than expected group sales volume (attributed to GST zerorisation), better sales mix and RM appreciation (against USD). An interim single tier dividend of 2.0 sen/share was declared (vs. 1.0 sen in 2Q17).

QoQ: Core PATAMI improved by 44.4% to RM20.2m in 2Q18 from RM14.0m in 1Q18, thanks to higher sales volume, improved sales mix and stronger RM in the quarter. MAA reported that domestic Nissan sales increased to 6.6k units in 2Q18 (+24.6% QoQ), Renault sales increased to 0.3k units in 2Q18 (+73.7% QoQ) and UD Trucks sales increased by 3.8% QoQ.

YoY: Although the revenue dropped 9.0% in 2Q18 due to lower sales volume, core PATAMI improved from loss of RM22.2m in 2Q17 to profit of RM20.2m in 2Q18 mainly contributed by strengthening of RM against USD and better sales mix.

YTD: Despite lower sales volume, revenue fell marginally to RM2,122.9m in 1H18 (-3.2% YoY) due to lower sales in Malaysia and Vietnam, which was offset by the stronger sales in other countries (i.e. Myanmar, Cambodia and Laos). However, core PATAMI returned to profit of RM34.1m in 1H18 from loss of RM53.7m in 1H17, thanks to better EBITDA margin from strengthening of RM since early 2018 as well as improvement in sales mix.

Outlook. TCM will leverage on the new Nissan Serena S-Hybrid (May 2018) and Nissan Urvan NV350 (Mar 2018) as well as upcoming Nissan Kicks compact SUV (slated in 4Q18) to remain competitive in the market. We expect TCM to register stronger top line growth in 3Q18, driven by higher car sales volume from the two months (Jul-Aug) of tax holiday period, which may offset the slower sales post effective SST implementation and weakened RM outlook in 4Q18.

Forecast. We make upward revision for FY18, FY19 and FY20 earnings to RM77.9m, RM114.0m and RM144.6m respectively (from RM41.7m, RM69.5m and RM94.1m) after imputing higher domestic sales volume and improved margins.

Maintain BUY, TP: RM2.18. TCM has shown signs of turnaround with strong RM20.2m profit in 2Q18 while current valuation remains undemanding at 0.4x P/NTA. The recent zerorisation of GST is expected to provide significant boost to TCM car sales volume in Malaysia. We maintain our BUY recommendation with higher TP of RM2.18 based on 0.5x P/NAV.

Source: Hong Leong Investment Bank Research - 15 Aug 2018