Period  2Q14/1H14

Actual vs. Expectations  Below expectations. The group reported 2Q14 core PATAMI of RM12.5m (-70% QoQ, -82% YoY), bringing 1H PATAMI to RM53.8m which made up only 23% of our fullyear forecast and 21% of the consensus estimates.

 Note that 2Q14 core PATAMI has been adjusted to exclude the write-back of Nissan Vietnam Co. Ltd (NVL)’s provision for additional import duty amounting to c.RM42m (74%-owned) payable by NVL in respect of the importation of CKD parts and kits for the period from 2010 to 2012 back then. (Please refer to our report dated back in 17th October 2013; Title: One-off Tax Hit) and some other non material one-off items amounting to RM0.3m.

 The negative deviations were: (i) lower-than-expected vehicle sales, (ii) higher-than-expected import cost due to unfavourable forex, and (iii) higher advertising and promotional expenses.

Dividends  A single tier interim dividend of 3.0 sen was declared for the quarter under review. This came in below our expectation as we were expecting 6.0 sen to be declared for this quarter and another 6.0 sen in 4Q14 (total 12.0 sen DPS in FY14).

Key Result Highlights YoY, the 1H14 revenue dropped by 9%, dragged down by lower vehicle sales (-9%). Taking a closer look at its Automotive segment, its previous pioneer position in the Malaysia B-segment with its Almera model being the key volume driver, has been replaced by competitors’ attractive newer models (such as Toyota Vios and Honda City). In terms of market share for non-national car segment, Nissan position (6.5%, -1.8ppts) skidded from No.2 to No.3 with Honda (12.6%, +4.6ppts) taking over the pole position. Meanwhile, at the core PATAMI level, the margin came in lower at 2.3% (-3.6ppts), corroded by higher costs incurred for aggressive counter-campaigns as well as higher unfavourable forex on imported CKD.

 QoQ, the 2Q14 revenue decreased by 14% with weaker revenue seen across all segments. Of noteworthy, the lion share revenue contributor, Automotive segment recorded the steepest drop (-14%) among all segments dragged by slower sales momentum. While segment EBITDA (before adjustment) increased 23% due to the write-back of provision for additional import duty amounting to c.RM42m (74%-owned), normalised segment EBITDA only came up to RM84.6m (-17% QoQ, with EBITDA margin of 7.8% or -0.3ppts) on higher import cost as well as higher incentives provided to sustain sales and competitiveness.

Outlook  We concurred with the group’s view that its operating environment in 2014 has been more challenging than expected due to: (i) lacklustre consumer sentiment on the back of subsidy rationalisation programmes, (ii) a weaker RM resulting in higher imported CKD costs (estimated c.90% of CKD packs imported in USD), (iii) intense domestic competition as well as higher operating costs from marketing and administering a wider geographical footprint.

 We also see the lack of attractive models, particularly in its key B segment (c.40% of our FY14E total vehicle sales assumption) to be the major drag to its competitiveness in its FY14.

Change to Forecasts  Post-results, we have cut our FY14-15E PATAMI forecasts to RM116.3m and RM203.9m (from RM250.6m in FY14 and RM296.1m in FY15) to mainly account for: (i) lower vehicle sales (FY14: from 54k to 50k, FY15: from 60k to 56k), (ii) lower EBITDA margin of 7.0% in FY14 (-1.6ppts) and 8.9% in FY15 (-0.4ppts) after accounting for higher marketing and administration costs and higher imported CKD costs.

Rating Downgrade to UNDERPERFORM (from MARKET PERFORM)

Valuation  Post our earnings revision, our TP is reduced to RM4.62 (from RM5.38) based on a targeted rollover PER multiple of 15x (being the average 4-year average forward PER). Note that our TP is now based on a valuation basis year of FY15.

Risks to Our Call  Stronger consumer sentiments.

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

Source: Kenanga