Result

• Tan Chong Motor (TCM) registered a headline net loss of RM1m during 4Q19. 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 loss, gain on derivatives, fair value adjustment on investment properties and impairment loss on PPE, TCM reported a core net loss of RM12m during this quarter as compared to core net profit of RM0.9m in last quarter and core net profit of RM117.5m a year ago.

• As for full year FY19, the Group reported a core net profit and revenue of RM29.8m and RM4.2b respectively, which depleted 84.1% yoy and 14.1% yoy respectively.

• Substantially below expectations. FY19 core net profit was substantially below ours and consensus expectations by only meeting 44.5% and 47.8% respectively of full year earnings estimates. The disappointing performance was due to subdued domestic car sales volume amid high-base effect due to tax holiday coupled with lower hire purchase receivables under Financial services segment.

Comment

• Disappointing QoQ and YoY amid sluggish domestic Nissan car sales. TCM’s revenue down 7.2% qoq and 16.5% yoy during 4Q19. Domestic Nissan car sales deteriorated 29.4% yoy but rose 39.2% qoq. Disappointing YoY revenue was due to lower car sales due to stiff competition among car makers which resulted in total domestic Nissan vehicles sales slide 30.3% yoy during FY19 with 3% market share (vs FY18: 5%). However, PBT increased 10% qoq, spurred by improved margin in view of strengthening MYR against USD and JPY, we believe. However, PBT was down 72.6% yoy on quarterly basis. Looking forward, the Group expects to launch all-new Almera, Kicks and Sylphy/Sentra to spur FY20 performance.

• Discouraging FY19. Overall, the Group’s revenue during FY19 dropped 14.1% yoy on the back of sluggish PBT which slid 36% yoy. The uninspiring performance was due to lower Nissan vehicle sales from Automotive segment as well as subdued hire purchase receivable from Financial services segment. On the same note, PBT margin also tumbled -0.9ppts during FY19.

• Looking forward, the Group expects business prospects remain exigent amid massive competition among carmakers, subdued consumer sentiment towards big-ticket items and forex volatility which could weigh down the Group’s overall performance. Besides, the Group reckons that business confidence as well as consumer sentiment could be dampened by ongoing Covid-19 outbreak which may affect overall business growth. Having said that, the Group remains optimistic with the upcoming new models launches and will continue its strategy of focusing product mix which is skewed towards high margin rather than volume to boost their Group’s business.
• Final dividend declared. The Group has announced a final single-tier dividend of 2sen/share amounting to RM13.1m for FY19.
• Lacklustre outlook for domestic Nissan sales volume. Overall, we reckon that domestic Nissan car sales remains subdued for FY20 due to stiff competition from other car marques amid lack of volume-driven models.

Earnings Outlook/Revision

• We cut our earnings forecasts for FY20 by 12.7% to RM61.9m to account for lower car sales volume and margin. Besides, we introduce FY21 earnings forecast of RM67.4m with +8.8% growth.

Valuation & Recommendation

• Maintained HOLD with a lower target price of RM1.15 (from RM1.21) following our earnings cut. Our valuation is now pegged at 12.8x FY2020 PE with revised EPS of 9sen (11sen previously). Target P/E ratio assigned is below 5-years historical mean PE of 16x.

Source: JF Apex Securities Research - 2 Mar 2020