Result

• Tan Chong Motor (TCM) registered a headline net profit of RM51.6m in 4Q18. After excluding the exceptional items such as provision/reversal and (write off) of receivables and inventories, gain on disposal of properties plant and equipment (PPE), PPE written off, forex gain and derivatives, fair value adjustment on investment properties, impairment loss on goodwill and PPE, the Group recorded a core net profit of RM117.5m in this quarter, increasing from a core net profit of RM34.9m recorded in 3Q18 and core net loss of RM7.9m in 4Q17. Meanwhile, revenue stood at RM1.2b, which depleted 25.6% qoq but improved 8.4% yoy.

• Within our expectations. As for full year of 2018, the Group reported a core net profit of RM186.7m against a core net loss of RM77.1m in 2017 amid higher revenue, +11.9% yoy. The result was within our in-house expectation, which account 102.7% from our forecast but substantially above market expectation (131.4%).

• The stellar yoy performance was mainly reinforced by higher car sales volume in domestic (during tax holiday) and overseas market coupled with better-than expected margin.

Comment

• Lower domestic Nissan car sales in 4Q18 weighed on the Group’s QoQ performance. TCM’s revenue in 4Q18 was down 25.6% qoq, in line with domestic Nissan car sales in 4Q18 which tumbled 10.6% qoq. The uninspiring Nissan car sales in the last quarter of the year was due to overwhelming strong sales during the tax holiday during June-August 2018. However, Group’s PBT margin improved 7.2%/ +3.6 ppts, thanks to favourable sales mix and lower impairment made for hire purchase receivable under financial services division.

• Tax holiday to boost Group’s topline and bottomline in 2018 amid strengthening Ringgit. Domestic Nissan vehicle sales remarked a growth of 5.4% in 2018 from total Nissan vehicle sales in 2017, thanks to tax holiday period which temporarily boosted the sales. Besides, the Group had introduced two new models - new Serena S Hybrid (May’18) and Nissan Urvan NV350 (Mar’18). Other than that, the Group’s PBT accelerated to RM178.6m from loss before tax of RM72.8m, mainly spurred by strengthening in Ringgit and higher loan book size under financial services division. We believe better margin was due to lower cost stemming from strengthening MYR against USD and JPY.

• Higher dividend declared. The Group has declared a final single tier dividend of 2sen in 4Q18 with total payout of RM13.13m. As such, the Group has paid a total dividend of 4sen for 2018 as compared to 2sen in 2017.

• Looking forward, the Group expects business prospect remains challenging following stiff completion among carmakers, subdued consumer sentiment towards big-ticket items, and lower loan rate approval amid current economic conditions, that could dampen the overall Group’s performance. However, we believe the Group will focus on high margin models rather than volume in order to lift their margin.

Earnings Outlook/Revision

• We increase our 2019F net earnings estimate by 28.6% to RM106m on the back of better than expected margins and sales volume. Besides, we would like to take this opportunity to introduce our FY20F net earnings of RM 115.6m, with growth of 9.1% yoy.

Valuation & Recommendation

• Maintain BUY with a higher target price of RM1.76 (RM1.68 previously) following our earnings upgrade. Our valuation is now pegged at 11x FY2019 PE (from 14x) with revised EPS of 16sen. Target P/E ratio assigned is below sector P/E of 15x. We believe the Group is able to sustain its growth momentum and hence earnings recovery is well underway.

• Recovery is well on course banking on sales and margin rebound. We believe TCM’s sales shall gradually recover in 2019F, as new models launched (probably Nissan Leaf in mid-2019) on top of the Group’s existing efforts to expand sales and after-sales network in Indochina. Also, we believe the Group could enjoy better margin going forward benefiting from strengthening MYR against USD and JPY.

Source: JF Apex Securities Research - 26 Feb 2019