Period  2Q14/1H14

Actual vs. Expectations The reported 1H14 net profit of RM148.2m (+31% YoY) came in below expectations at 35% and 38% of our and consensus full-year net profit forecasts. The variance from our forecast is mainly due to higher-than-expected effective tax rates.

Dividends  No dividend was declared.

Key Results Highlights YoY, the 1H14 revenue fell 4% to RM6.7b due to lower contributions from automotive (-4%) and property, asset & construction (-43%). The lower revenue from automotive segment was due to different sales mix of

vehicles and property while asset & construction segment was affected by lower billings recognised from property development. Despite the divestment of Hicom Power, revenue in the services segment was flat due largely to growth from Alam Flora (+90%) and KLAS (+26%). The solid improvement from Alam Flora was due to higher tariff rates.

 Despite the lower revenue, 1H14’s net profit came in at RM148m due to lower effective tax rate and higher contribution from the automotive segment which we believe could be due to narrowing losses at Lotus indicating that margins may have stabilised. Associates’ contributions from POS and Honda were largely flat.

 In the automotive segment, its vehicle sales rose across the board 2Q13 YoY, driven by Proton (+20%) mainly on the introduction of Saga SV, which led to a staggering 72% jump in overall sales of Saga and to a lesser extent from Suprima S, which was introduced in Aug 2013, Audi (+135%) and Isuzu (+16%) which more than offset the fall in Suzuki (-32%).

 QoQ 2Q14 net profit rose sharply to RM138m due to solid improvement from automotive as well as a lower effective tax rate of 26% in 2Q14 compared to 54% in 1Q14.

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. The recent sale of UniAsia could negate earnings upside in subsequent quarters.

Change to Forecasts We downgrade our FY14E and FY15E net profit forecasts by 6% and 10%, taking into account a higher effective tax rate and lower vehicle sales assumption.

Rating Maintain MARKET PERFORM. The SOP derived target price is also reduced from RM2.69 to RM2.62.

Risks to Our Call  Economic uncertainty and a weak consumer sentiment.

Source: Kenanga