We came away from the 3Q13 briefing feeling NEUTRAL as we view that its main revenue contributor - Auto segment (contributing c.69% to the group's FY14E revenue) is likely to see continuing margin compression going forward amidst stiff competition. While margin corrosion remains a drag factor, there is a silver lining which is the encouraging response for its new Vios (with YTD bookings of 16k) which could offset the earnings dilution. Meanwhile on the O&G segment, while Naga 3 was down in Sept-13 for a short and will be due for repairs in 1Q14 for c.2-3 weeks, we gather that the impact will not be material as the repair cost which is estimated to be c.RM1m is covered by insurance. Post briefing, we have trimmed our FY13E and FY14E earnings by 5% and 9% taking into account for lower EBIT margin in Automotive segment assuming higher A&P expenses and discounts in light of the stiff competition from other players. We have also switched our relative valuation, which is based on PER to sum-of-part (SoP) valuation to better reflect the earnings contribution from the UMW O&G portion. Coupled with the earnings revision, our TP has been reduced marginally from RM13.39 to RM13.16. Maintain MARKET PERFORM.

Further details on its 3Q13 results. The group recorded a sub-par 3Q13 PATAMI of RM101.5m (-60% QoQ, -66% YoY) mainly dragged down by lower Toyota sales on the run-out of the previous Vios model as well as the lower margin on higher selling and distribution expenses amidst aggressive advertising and promotional activities. In light of the strong balance sheet post UMW O&G listing (with current cash of RM2.1b as well as low net gearing of 0.2x), a special dividend of 10.0 sen was declared, bringing YTD dividend to 35.0 sen which implies a net dividend yield of c.3%.

Silver lining being the encouraging response for new Vios. While we expect higher selling and distribution expenses going forward arising from the group aggressive A&P and discount activities to tackle the intense competition, which could lead to continual margin compressions, the silver lining lies with the new Vios. It is noteworthy that since the launching of new Vios, the response has been encouraging with 16k bookings. If we were to annualise the YTD September figure (c.65k for Toyota and Lexus) with an assumption of 16k new Toyota Vios sales in 4Q13 (total at c.102k), we reckon that it could beat our FY13 car sales assumption of 95k by another 7k. However, we prefer to keep our FY13 sales assumption for now as we are expecting a slowdown in its other models. For the Toyota sales outlook in 2014, management believes that the total sales will be mainly supported by new Vios sales (with 36k sales assumption in 2014). Meanwhile, on our take for FY14, we prefer to err on the conservative side by assuming unchanged total sales of c.31k annually for Vios which constitute 30% of total Toyota sales assumption, taking cues from its historical sales trend. Meanwhile on the expiration of tax exemption for the CBU and CKD Hybrid vehicles (due on Dec 2013), management is considering setting up the assembly plant for hybrid vehicles in Malaysia depending on the incentives in the upcoming revised National Automotive Policy, to act as a buffer for potential lower CBU Toyota hybrid vehicle sales (at c.6% of total Toyota and Lexus vehicle sales).

Further details on the 3Q13 performance of Oil & Gas segment. Upon further confirmation from the management, we understand that Naga 3 was down in Sep-13 for a short while; and it is expected to go for repairs in 1Q14 for around 2-3 weeks. While there could be repair cost (of c.RM1m) incurred in 1Q14, we understand that this minimal amount will be covered by the insurance claims. On the outlook for UMW O&G segment in 2014, our view concurred with the management that the prospect will remain bright, mainly underpinned by the new development of marginal field as the expiration of some of the foreign jack-up rigs going forward, which should lend strength to higher demand for local jack-up rigs.

Our take post 3Q13 briefing. We have trimmed our FY13E and FY14E earnings by 5%-9% taking into account lower EBIT margin in the Automotive segment assuming higher A&P expenses and discounts in light of the stiff competition from other players. Post UMW O&G listing, we switched our valuation method from relative valuation, which is based on PER to SoP valuation to better reflect the earnings contribution from UMW O&G segment. Coupled with the earnings revision, our TP is reduced from RM13.39 to RM13.16 which implies a FY14 PER of 15.6x, at +1.5SD above the average PER mean. Maintain MARKET PERFORM.

Source: Kenanga