We came away from its 2Q13 briefing feeling NEUTRAL to SLIGHT NEGATIVE as we believe bottom line growth for FY13 –FY14 will be suppressed by margin compression in the motor trading and auto parts manufacturing segments despite higher contribution from share of results of associates. Post results briefing, we have reduced our FY13E-FY14E earnings by 2-3% taking into account the lower EBIT margin assumption at its motor trading segment. Consequently, the TP is reduced slightly from RM3.69 to RM3.66 based on 8.7x FY14E EPS (being the +1SD above its 5-year forward average PER). Remain UNDERPERFORM in view of the lack of immediate rerating catalysts for the stock.

Further details on the 2Q13 results. On a YoY basis, 2Q13 PATAMI increased by 26% despite lower revenue, which fell 6%. This was due to the higher contribution from share of results of associate companies, which saw a robust growth of 37% on the back of better vehicle sales in Perodua. On a closer look at its weaker revenue performance, customers’ wait-andsee approach in anticipation of car prices reduction during the 13th GE period, particularly in the premium car subsidiary which affected Federal Auto (-19%) which distributes Volvo, Volkswagen & Mitsubishi was the main culprit for the 7% decline in motor trading revenue.

Better revenue growth but lower margin at its motor trading segment going forward. With the ongoing good reception of Perodua Sseries coupled with the introduction of new models (i.e. VW Golf GTi, Volvo V40 and Mitsubishi Attrage) in 2H2013, we believe the group’s top line growth will remain positive amidst the favourable interest rate environment that will support new vehicle demand. However, at the EBITDA level, we believe the segment margin could continue to be compressed with greater discount offered to achieve target sales among the major car makers due to stiff competition as well as on pressure from government on car prices reduction. Besides, higher interest cost and depreciation particularly in Federal Auto (FAHB) for auto financing and outlets investment will also remain a drag on group’s earnings going forward.

Price reduction pressure in auto-parts manufacturing segment. While the improvement in 2Q13 revenue (+8% QoQ, +2% YoY) on the back of increase in production volumes from major car makers has narrowed the drop in 1HFY13 revenue, YTD margins remain soft dragged down by price reduction pressure from customers demanding lower car prices. Coupled with the ongoing gestation period of OMI (expected to stabilise by the end of 2014 with the breakeven for alloy wheel division), we are not expecting any major rebound for its auto-parts manufacturing anytime soon.

The silver lining is the higher contribution from share of results of associates. While we expect the group EBIT to head south with the cutthroat EBIT margin, the YTD share of results of associates continue to register robust growth (+21% YoY) with better car sales. Riding on the better prospects in its unlisted associates, Perodua (of c.20%) and Hino (c.42%), the impact from the EBIT margin compression should be negated at the bottom line performance of the group.

Source: Kenanga