Disappointing TCM’s 4QFY19 core net loss of RM12.0m, dragged FY19 core profit lower to RM29.8m (-84.0% YoY), achieved only 47.4% of HLIB’s FY19 expectation and 47.8% of consensus. The weak result was mainly dragged by lower than expected Malaysia sales volume as well as higher effective tax rate. Cut earnings forecast for FY20-21 by 87.6% and 34.6%. We downgrade our recommendation on TCM to SELL (from Hold) with lower TP of RM1.00 (from RM1.42) based on unchanged 10x PE to FY21 earnings, as the group’s near term outlook remain challenging with weak consumer sentiment, competitive market structure and lack of attractive models.

Below expectation. TCM reverted back to core LATMI of -RM12.0m for 4QFY19, which dragged FY19 PATMI down to RM29.8m; achieved 47.4% of HLIB forecast and 47.8% of consensus. The disappointment was attributed to lower than expected Malaysia sales volume as well as higher effective tax rate.

Dividend: Proposed a final dividend of 2 sen/share (ex-Date to be determined on a later date), taking full year dividend to 4 sen/share (3.2% yield).

QoQ/YoY: Reverted to core loss of -RM12.0m (from profit of RM0.9m in 3QFY19 and RM117.5m in 4QFY19) mainly due to lower margins on stiff competition in Malaysia and lower sales volume in Indochina market.

YTD: Core earnings deteriorated 84.0% YTD, mainly due to lower group sales volume (especially in Malaysia post GST free period in mid-2018), lower margins, and increased depreciation charges as well as net interest costs following capacity expansions in Vietnam and Myanmar coupled with higher effective tax expense.

Outlook. Moving forward, we expect the Malaysia automotive market to remain competitive in 2020 on deteriorating consumer sentiments following the recent outbreak of Covid-19 and domestic political uncertainty. Furthermore, 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 post 2020. Oversea expansion plans may affect margins due to high start-up costs.

Forecast. Cut earnings for FY20-21 by 87.6% and 34.6% respectively.

Downgrade to SELL, TP: RM1.00. Following the earnings disappointment and forecasts revision, we downgrade TCM to SELL (from Hold) with lower TP of RM1.00 (from RM1.42) based on unchanged 10x PE to FY21 earnings. Despite TCM trades at an attractive P/B valuation of only 0.3x, we reckon the group will remain dampened by weak consumer sentiment, competitive market structure and lack of new model launches in the immediate term, while dividend of 4sen/share is relatively unattractive.

Source: Hong Leong Investment Bank Research - 9 Mar 2020