Period  3Q14/9M14

Actual vs. Expectations The reported 9M14 net profit of RM289.9m (-43% YoY) appears to be in line with our forecast and consensus full-year estimates. However, excluding a one-off gain from bargain purchase amounting to

RM111.7m, the 9M14 core net profit actually underperformed, at RM178m or only 46% and 51% of our forecast and consensus full-year forecasts, respectively. The variance from our forecast is mainly due to losses suffered at the automotive division of which we believe is due to Lotus.

Dividends  No dividend was declared.

Key Results Highlights YoY, 9M14 revenue rose 3% to RM10b due to higher segmental contributions from automotive (+4%) and services (+3%) which was negated by lower contribution from the property division (-37%) despite its small base. The higher revenue from automotive segment was due to higher vehicle sales from Proton, Audi and Isuzu while asset & construction segment was affected by lower recognised billings from property development. Despite the divestment of Hicom Power, revenue in the services segment manages to achieve a small growth due largely to Alam Flora (+76%) and KLAS (+26%). The solid improvement from Puspakom was due to higher TIV growth of 5%.

 9M14 core net profit came in at RM178m due to 3Q14 losses suffered in the automotive division which we believe could be from Lotus. This was further exacerbated by a higher effective tax rate and lower associates’ contributions from POS and Honda.

 QoQ 3Q14 core net profit fell sharply to RM30m compared to RM138m in 2Q14 due to an unexpected loss in the automotive division of which we believe is due to Lotus.

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. 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 15% and 12%, taking into account higher than-expected losses in Lotus.

Rating Maintain MARKET PERFORM. The SoP derived target price is also reduced from RM2.62 to RM2.53.

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

Source: Kenanga