Period  1Q14

Actual vs. Expectations Below expectations. The group reported 1Q14 core PATAMI of RM41.3m (-46% QoQ, -51% YoY) which made up only 13% of both our full-year estimates and that of the consensus. The main negative deviations were the lower-than-expected vehicle sales as well as the higher-than-expected marketing costs.

Dividends  As expected, no dividend was declared for the quarter under review.

Key Result Highlights YoY, the 1Q14 revenue dropped by 12%, mainly dragged down by lower vehicle sales (-19% YoY to 12,010 units in terms of vehicle sales) in the Automotive segment with its market share being clawed by competitors’ attractive newer models. Of noteworthy, the lower vehicle sales also reflected the normalisation from the high base in 1Q13 (at 14,753 units which was mainly boosted by the overwhelming demand for the Nissan Almera). In terms of market share for non national has now skidded from No.2 to No.3 with Honda (9.8%, +2.2ppts) replacing its position. Meanwhile at the EBITDA level, the margin came in lower at 8.1% (-2.3ppts), corroded by higher costs incurred for aggressive counter-campaigns as well as higher unfavourable forex on imported CKD.

 QoQ, the 1Q14 revenue decreased by 7% as the revenue gain in financial services (+16%) as well as investment and properties segments (+32%) were erased by the lower sales volume in Automotive segment (-7%, mainly due to high base in 4Q13 with aggressive bookings concluded during the quarter). Meanwhile, the group’s EBITDA dropped 25% on a thinner margin of 8.1% (-2.0ppts) mainly due to the higher promotional campaigns costs amid the stiff market competition.

Outlook  We concurred with the group’s view that 2014 could be challenging on several fronts, namely: (i) subsidy rationalisation programmes which will likely dampen consumers’ appetite for big ticket items such as new motor vehicles, (ii) a weaker RM resulting in higher imported CKD costs, (iii) intense domestic competition as well as higher operating costs from marketing and administering a wider geographical footprint.

Change to Forecasts Post results, we have reduced our FY14-15 PATAMI forecasts by 8-19% to account for: (i) lower vehicle sales (FY14: from 59k to 54k, FY15: from 61k to 60k), (ii) lower EBITDA margin of 8.6% in FY14 (-0.7ppts) and 9.3% in FY15 (-0.4ppts) after accounting for higher marketing and administration costs.

Rating Downgrade to MARKET PERFORM.

Valuation  Post earnings revision, our TP is reduced to RM5.38 (from RM6.57) based on an unchanged targeted PER

multiple of 14x (being the +0.5SD above its 3-year average forward PER).

Risks to our call  Stronger consumer sentiments.

 Favourable forex trends (Strengthening of the Ringgit against the USD and the JPY), which may lift up margins.

Source: Kenanga