Period  2Q14/1H14

Actual vs. Expectations Below expectations. The group reported 2Q14 normalised PATAMI of RM174.9m, bringing its 1H normalised PATAMI to RM386.7m which made up only 41% of our and the consensus full year earnings estimates, respectively.

 Note that the 2Q14 normalised PATAMI has been adjusted by excluding the non-core items totalling -RM32.9m which consists of: (i) provision for expected loss on disposal of its Auto components companies in India amounting to RM93.2m, (ii) the gain on disposal of properties of RM29.6m, (iii) the impairment of investments of RM9.2m, and (iv) derivatives gain of RM34.3m, as well as others non-core items of RM5.5m.

 The negative deviations were: (i) lower-than-expected margins in Automotive segment due to higher discounts given fierce competition in the 2Q14, (ii) lower than expected earnings contribution from its associate (Perodua), and (iii) higher than expected tax rate in 2Q14.

Dividends  As expected, an interim single-tier dividend of 10.0 sen per share was declared. We are projecting total DPS of 50.0 sen (DPR of 62%) which implies a 4% net yield.

Key Result Highlights YoY, 1H14 revenue increased by 10% due to higher revenue contributions across the Automotive and Oil & Gas segments. Meanwhile, normalised PATAMI declined by 14% to record at RM386.7m with lower core NP margin of 5.1% (-1.5ppts) seen, dragged down mainly by its associate (-17% YoY at associate level) and Equipment segment.

 QoQ, 2Q14 revenue improved by 11% with growth seen across all segments. However, normalised PATAMI was lower at RM174.9m (-17%) on the back of lower profitability in its Automotive and O&G segments.

 QoQ, Automotive: 2Q14 revenue increased by 9% due to the higher Toyota vehicles sales which were mainly driven by the overwhelming response for the newly launched Vios and Corolla Altis. However, its segmental PBT recorded a flat growth on the back of lower PBT margin (-1.2ppts) mainly due to more incentives given to push sales amidst fierce competition.

 YoY, Equipment: 1H14 revenue weakened by 4% dragged down by the continued drop in commodity prices in Papua New Guinea and the prolonged suspension of mining activities in Myanmar. Coupled with the lower operational efficiency, PBT decreased by 15%.               

 YoY, Oil & gas: 1H14 revenue recorded a decent growth of 34% on the back of: (i) full contribution from NAGA 4 which commenced operations on April 2013, (ii) higher daily operating rates for NAGA 2, and (iii) higher operating days for NAGA 1 and additional contribution from NAGA 5 which commenced operations in May 2014. Similarly, PBT increased by 29% to RM124.5m.

 YoY, M&E: 1H14 revenue inched up by 2% mainly due to the stable overall demand in the lubricants and automotive business. However, PBT recorded a three-fold jump due to higher gain from retranslation of USD term loans.

Outlook  For FY14, the group had in the last quarter forecasted combined total sales at 295.4k units (+3%), a similar quantum of forecast shared by us (295.9k, +3%). Despite a higher sales forecast, we expect margin to decline in view of cost-push factors as well as the stiff competition, particularly in the B & C segment.

Outlook (continued)  On the Oil and Gas segment, it is worth noting that UMWOG is set to receive 3 new jack-up rigs in FY14 which we believe should be able to secure contracts given that there are at least 17 rig contracts that are expiring from mid-2013 to 2015. Note that we have already factored these into our estimates.

Change to Forecasts  Post-results, we have cut our FY14-15 PATAMI forecasts by 10% to 15% to mainly account for: (i) lower EBIT margin assumption in the Automotive segment assuming higher A&P expense and discounts in light of the stiff competition from other players, and (ii) lower earnings contribution from its associate.

Rating Maintain MARKET PERFORM

Valuation  Post our earnings revision, our TP is reduced to RM13.37 (from RM13.93) which is based on a SoP valuation (implies 16.8x FY15 PER, at its +1SD above the average PER mean).

Risks to Our Call  Lower-than-expected vehicle sales.

Source: Kenanga