TCM’s 2QFY19 net profit of RM18.8m (-15.1% QoQ, -6.9% YoY) and 1HFY19 of RM40.8m (+19.8% YoY) came in within HLIB’s FY19 expectation (48.6%), but below consensus (41.0%). Declared interim dividend of 2.0sen/share (ex-date: 11 Sep 2019). We upgrade our recommendation on TCM to BUY (from Hold) with unchanged TP of RM1.70 based on 10x FY20f PE, as we believe TCM is currently trading at an attractive valuation (implied P/B of only 0.3x) with sustainable earnings and cash flow.

Within expectation. TCM reported core net profit of RM18.8m for 2QFY19 and RM40.8m for 1HFY19, which was within HLIB’s FY19 forecast at 48.6%, but below consensus (41.0%)

Dividend: Declared first interim dividend of 2.0sen/share (ex-date: 11 Sep 2019).

QoQ/YoY: Overall earnings dropped 15.1% QoQ and 6.9% YoY respectively, mainly due to higher group effective tax expenses, despite the improvement in overall operating profits and margins (see Figure #1), which we suspect was due to higher tax on the better profitability of operations in Malaysia and oversea (excluding Vietnam). We note that Vietnam reported higher losses in the quarter.

YTD: Core earnings increased by 19.8% on improved sales mix and margins following new launches of X-trail in Malaysia market and Nissan Patrol in Indochina market.

Outlook. Moving forward, we expect the Malaysia automotive market to remain competitive in 2019 while TCM is being disadvantaged by the lack of new attractive model launches for the year. Nevertheless, management has continued to prove itself in maintaining profitability for the past years with strong focus on sustainable margins and careful not to engage in competitive pricing. Management has also indicated two new attractive models i.e. Nissan Kicks and Nissan Almera to be introduced in year 2020. Furthermore, we expect Nissan sales in Indochina market to continue gain traction, in line with the growing affluence of the population.

Forecast. Unchanged.

Upgrade to BUY, TP: RM1.70. Following the share price slide over the past few months, we upgrade to BUY (from Hold) recommendation on TCM with unchanged TP of RM1.70 based on 10x FY20f PE. We believe TCM is currently trading at an attractive valuation (implied P/B of only 0.3x) with sustainable profits and cash flow. TCM is expected to continue pay out dividend of 4sen/share per annum.

Source: Hong Leong Investment Bank Research - 21 Aug 2019