Period  1Q14

Actual vs. Expectations  The reported 1Q14 net profit of RM10.3m (-64% YoY) came in below our and consensus expectations. The variance from our forecast is mainly due to lower-thanexpected vehicle sales and a higher-than-expected effective tax rate. Stripping out gains on disposal of investment securities (RM4.4m) and gains from disposal of equipment (RM2.7m), the 1QY14 core net profit would be lower at RM3.2m.

Dividends  No dividend was declared.

Key Results Highlights  YoY, the 1Q14 revenue fell 11.8% to RM3.1b due to lower sales in the automotive sector (-15.5%) but mitigated by other sectors such as services (+1%) and property & construction (+24%). Specifically in the automotive sector, lower Proton sales were cushioned by higher sales in other marques. Proton recorded a 20% drop in vehicle sales followed by Suzuki (-53%) and Mitsubishi (-4%). However, other marques performed better such as Audi (+99%) and Honda (+22%). In the services segment, improved performance by Alam Flora and Uni.Asia General cushioned the lower revenue from Bank Muamalat and exclusion of Hicom Power (after being sold). Specifically, growth was driven by Puspakom (+1%) and KL Airport Services (+26%) and Alam Flora (104%). In the property segment, topline growth was driven by progress billings from Glenmarie Gardens and Laman Glenmarie projects.

 YoY, 1Q14 operating profit rose 3% on the back of improvement from automotive (+81%), potentially indicating smaller losses at Lotus. However, this was dragged down by loss of contribution from the sale of Hicom Power in FY13 in the services division (33%).

 Pre-tax profit came up to RM96m but due to profits from some companies, which cannot be set-off against losses incurred by other subsidiaries, the higher 54% effective tax rate dragged down the net profit to only RM10.3m.

Outlook  Earnings contributions from its RM7.55b AV8X8 contract will start from FY14 onwards while the property division is expected to contribute positively as the group plans to launch property development projects with a total GDV of RM13.3b in 2013-15. Assembly volumes for Volkswagen vehicles should also gather pace in FY14. Additionally there is a gain of RM89m from the Johor lands disposal expected to be reflected in subsequent quarters results. However, contribution from services segment could shrink after the sale of Hicom Power.

Change to Forecasts  We are slashing our FY14E and FY15E net profit by 20% taking into account the poor set of results and lower vehicle sales assumption.

Rating   Maintain MARKET PERFORM. The SOP derived target price is also reduced from RM2.81 to RM2.69.

Risks  Economic uncertainty and a weak consumer sentiment.

Source: Kenanga