Period  1Q14/3M14

Actual vs. Expectations  Below expectations. The group reported a 1Q14 PATAMI of RM23.4m (-29% YoY; -30% QoQ), which only made up 16% and 15% of our full-year forecasts and the consensus, respectively.

 The main negative deviations were: (i) lower-than expected vehicle sales across all subsidiaries and (ii) the lower-than-expected contribution of share of results of associates.

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

Key Result Highlights YoY, 1Q14 revenue declined by 17% as the decent growth driven by the higher production volumes in Auto parts manufacturing (+9%) was negated by lower vehicles sales in the Motor vehicles trading segment (-21%). Taking a close look, all of its subsidiaries namely DMMS which trades Perodua vehicles (-7%), DMSB (Daihatsu & Hino trucks -24%) and Federal Auto (continental makes -17%) registered lower vehicle sales with its market share clawed by competitors’ attractive newer models as well as being dragged by lower consumer spending appetite amid rising costs of living. While FY13 EBITmargin remained relatively unchanged at 2.4%, PBT margin dropped by 0.5ppts to 7.2%, dragged down by the new manufacturing facilities start-up costs in its share results of associates (-24%).

 QoQ, the 1Q13 revenue dropped marginally by 1% as the lower production volumes from the Auto Parts Manufacturing (-19%) was offset by higher sales of continental makes in the Motor Trading segment, which is also the lion share revenue contributor (+5%). However, EBIT dropped significantly by 44% with cut throat margin (-1.9ppts) seen at the Motor Trading segment (-55%) as well as lower profitability at the Auto Parts segment due to the increased utility prices and labour costs.

Outlook  We believe the group will continue to operate in a tough operating environment arising from intense competition in both its divisions, thus leading to razor-thin margins.

Change to Forecasts Post-results, we have reduced our FY14-15E PATAMI forecasts by 11%-19% to account for: (i) lower sales assumption in all its subsidiaries and (ii) lower EBIT margin for higher marketing and administration costs.

Rating Maintain UNDERPERFORM

Valuation  Post earnings revision, our TP is reduced to RM2.92 (from RM3.25) based on a targeted PER multiple of 10x (close to the +0.5SD above its 3-year average forward PER).

Risks to Our Call Better-than-expected sales volume.

Source: Kenanga