Period  2Q14/1H14

Actual vs. Expectations Within expectation. The group reported 2Q14 net profit (NP) of RM31.2m (-16% YoY; +33% QoQ), bringing 1H NP to RM54.7m (-22%) which made up 47% and 43% of our full-year FY14 forecast and the consensus, respectively.

Dividends  As expected, a first interim dividend of 4.0 sen was declared for the quarter under review. We are expecting a total net DPS of 6.0 sen to be declared in FY14 (DPR of 21%), which gives a net yield of 2.1%.

Key Result Highlights YoY, the group 1H14 revenue declined by 9% as the decent growth driven by the higher production volumes in Auto parts manufacturing (+16%) was negated by lower vehicles sales in the Motor vehicles trading segment (-14%). Taking a close look at its motor trading segment, all of its subsidiaries namely DMMS, which trades in Perodua vehicles (-1%), DMSB- Daihatsu & Hino trucks (-20%) and Federal Auto - continental makes (-19%) registered lower vehicle sales with its market share being clawed by competitors’ attractive newer models as well as being dragged by lower consumer spending appetite amid rising costs of living. While 1H14 EBIT margin inched up by 0.1ppts to 2.9%, PBT margin dropped by 0.6ppts to register at 7.8%, dragged down by the lower volumes and new manufacturing facilities start-up costs in its share results of associates (-21%).

 QoQ, the group’s 2Q13 revenue improved by 11% mainly due to the seasonally stronger sales in its Motor Trading segment (+9%) during pre-Hari Raya festival as well as the higher production volumes in its Auto parts manufacturing (+21%). With higher operational efficiencies coupled with the higher earnings contribution from its associate (+16%), NP improved by 33% on higher EBIT margin (+0.9ppts to 5.5%).

Outlook  We believe FY14 will be the year of transition for the group given the effect from startup costs and the tighter financing conditions which dampens the demand for new vehicles.

Change to Forecasts We leave our FY14E and FY15E earnings estimates unchanged for now.

Rating Maintain UNDERPERFORM

Valuation  Our TP remained unchanged at RM2.92. This is based on a targeted FY14 ER multiple of 10x (close to the +0.5SD above its 4-year average forward PER).

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

Source: Kenanga