Period  3Q14/9M14

Actual vs. Expectations Within expectation. The group reported 3Q14 normalised PATAMI of RM175.2m, bringing its 9M normalised PATAMI to RM605.5m. The results came in within our (at 75%) but below the consensus (at 68%) full-year earnings estimates.

 Note that the 9M14 normalised PATAMI has been adjusted by excluding the non-core items totalling RM31.0m which consists of: (i) provision for expected loss on disposal of its Auto components companies in India amounting to RM89.6m, (ii) the gain on disposal of properties of RM30.6m, (iii) the impairment of investments of RM7.6m, and (iv) derivatives gain of RM48.7m, as well as others immaterial non-core items of -RM13.1m.

Dividends  As expected, a second interim single-tier dividend of 15.0 sen per share was declared, bringing its YTD DPS to 25.0 sen (similar to FY13). We are expecting total DPS of 50.0 sen (DPR of 74%) to be declared which implies a 4.4% net yield.

Key Result Highlights YoY, 9M14 revenue increased by 9% due to higher revenue contributions across the Automotive and Oil & Gas segments. Meanwhile, normalised PATAMI declined by 8% to RM605.5m with lower core NP margin of 5.4% (-1.0ppts) seen, dragged down mainly by its associate (-36% YoY) and Equipment segment.

 QoQ, 3Q14 revenue decreased by 7% with growth in Oil & gas negated by weaker sales in Automotive, Equipment and M&E segment. However, normalised PATAMI came in flat at RM175.2m helped by lower finance cost and lower effective tax rate.

 QoQ, Automotive: 3Q14 revenue decreased by 9% as consumers took a wait-and-see approach in anticipation of the 2015 National Budget announcement in October 2014. Segmental PBT came down 16% with lower PBT margin seen (-1.1ppts) which we believe was partly due to more incentives given to push sales amidst fierce competition.

 YoY, Equipment: 9M14 revenue marginally decreased by 1% due to weaker revenue in heavy equipment moderated by higher demand for Toyota forklifts in the industrial equipment segment. With the lower operational efficiency, PBT decreased by 17%.

 YoY, Oil & gas: 9M14 revenue recorded a decent growth of 30% on the back of: (i) full contribution from NAGA 4 which commenced operations on April 2013, (ii) higher rig utilisation and time charter rates for NAGA 2, and (iii) higher utilisation rate for NAGA 3 and additional contribution from NAGA 5 which commenced operations in May 2014. Similarly, PBT increased by 33% to RM200.4m.

 YoY, M&E: 1H14 revenue came in flat at RM551.0m mainly due to stiff competition in the lubricant business and lower contributions from the local automotive component manufacturers. However, PBT recorded a two-fold jump due to higher gain from retranslation of USD term loans and improved margin from the lubricant business in China.

Outlook  For 4QFY14, the group’s revenue is expected to be partly helped by its associate, Perodua with the introduction of EEV in September 2014. We are expecting margin to decline in view of the 4Q14 aggressive campaigns and promotions (typically a period to meet auto distributors' year-end targets) in Automotive segment.

 Moving forward into FY15, we expect its Automotive segment to register flat growth of +2.5% with the assumption of: (i) lacklustre consumer sentiment on the back of subsidy rationalisation programmes, (ii) tighter financing conditions, (iii) intense domestic competition, particularly in the B & C segments.

Outlook (continued)  On the Oil and Gas segment, while the sector is currently facing headwinds with prospects of a de-rating, the downside could be partly cushioned by its two new jack-up rigs in that will see delivery in December FY14 and September FY15 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.

Change to Forecasts  Post-results, we have trimmed our FY14-15 PATAMI forecasts by 1%-2% for house-keeping purposes.

Rating Maintain MARKET PERFORM

Valuation  While there are no changes in our key earnings assumptions, our TP is reduced to RM11.70 from RM13.37 after we cut our targeted PER ascribed on the O&G business from 21.0x to 15.0x in lieu of the O&G sectorwide de-rating amidst uncertain oil price environment. Our TP of RM11.70 is based on a SoP valuation (implies 15.1x FY15 PER, at its +0.5SD above the average PER mean).

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

Source: Kenanga