Period  3Q14/9M14

Actual vs. Expectations Within house expectation. The group reported a 3Q14 net profit (NP) of RM25.5m (-27% YoY; -18% QoQ), bringing its 9M NP to RM80.2m (-24%) which made up 68% of our, and the consensus, full-year NP forecasts.

 We deem the results to be within expectations as we are expecting a better 4Q NP (of RM37.4m, expected to make up 32% of the full year NP forecasts), on the back of full sales contribution of Perodua Axia (expected to be 28k). Note that in Aug14, Perodua had stopped the production of Viva while the new model-Perodua Axia was only being revealed in September with delivery starting from October.

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

Key Result Highlights YoY, the group 9M14 revenue declined by 10% 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 (-14%). Taking a close look at its motor trading segment, all of its subsidiaries namely DMMS which trades Perodua vehicles (-6%), DMSB-Daihatsu & Hino trucks (-14%) and Federal Auto-continental makes (-17%) 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 EBIT margin only dropped by 0.2ppts, PBT margin came down by 0.9ppts to register at 7.7%, exacerbated by the lower volumes and new manufacturing facilities start-up costs in its share results of associates (-22%).

 QoQ, the group’s 3Q14 revenue dropped by 14% mainly due to lower sales in its Motor Trading segment (-13%) which was on: (i) the normalisation of base effect (back then during pre-Hari Raya festival) as well as (ii) buyers holding back in anticipation of the launch of Perodua Axia. Coupled with the lower earnings contribution from its associate (-10%, with the model run-out of Perodua Viva), PBT decreased by 24%.

Outlook  We see FY2014 to be the transition year for the group given the effect of startup cost as well as the tighter financing conditions which dampen vehicle purchases.

 Moving into FY15, we expect earnings to rebound underpinned by: (i) upcoming contracts to be secured for its OMI Alloy plant starting from the end of 2014, (ii) full sales contribution from the new model launching-Perodua Axia, and (iii) breakeven in the new plants of its associates.

Change to Forecasts We leave our FY14-FY15 earnings estimates unchanged for now.

Rating Maintain MARKET PERFORM

Valuation  Our TP remained unchanged at RM3.06. This is based on a targeted FY15 PER multiple of 9.0x (close to the +0.5SD above its 4-year average forward PER).

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

Source: AmeSecurities