Period  4Q14/FY14

Actual vs. Expectations  Below expectations. The group reported 4Q14 core losses of RM0.4m (-104% QoQ, -100% YoY), bringing its core PATAMI to RM67.6m (-77%) which made up only 72% of our and 58% of the consensus full-year estimates, respectively.

 Note that FY14 core PATAMI has been adjusted by excluding: (i) the write-back of Nissan Vietnam Co. Ltd (NVL) 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, (ii) provision for and write off of receivables and inventories totalling to c.RM19m, (iii) gain on disposal of PPE amounting to c.RM13m, (iii) and some other non-material one-off items amounting to RM0.4m.

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

Dividends  As expected, a single tier dividend of 3.0 sen was declared under the quarter review, bringing the YTD NDPS to 6.0 sen (or 58% DPR) which implies a 1.8% net yield.

Key Result Highlights  YoY, FY14 revenue dropped by 8% mainly dragged down by lower vehicle sales (-9%). Taking a closer look, its previous pole position in the Malaysia B-segment with its flagship Almera being the key volume driver, has been grabbed by the competitors’ attractive B segment new models (Toyota Vios and Honda City). In terms of market share for non-national car segment, Nissan (6.8%, -1.1ppts) skidded from No.2 to No.3 with Toyota (12.5%, +1.9ppts) replacing its prime position. Meanwhile at the core PATAMI level, the margin came in lower at 1.4% (-4.1ppts), corroded by higher costs incurred for aggressive counter-campaigns, higher discounts provided as well as higher unfavourable forex on imported CKD.

 QoQ, the 4Q14 revenue increased by 10% mainly driven by its Automotive segment (+10%). While the decent sales growth was boosted by heavy promotional activities amidst the yearend festivities sales, profitability contracted with EBITDA margin shrinking further to 4.0% (-4ppts).

Outlook  We view that its operating environment in 2015 will continue to stay challenging on: (i) lacklustre consumer sentiment on the back of rising cost of living, (ii) tighter financing conditions which dampen vehicle purchases, (iii) intense domestic competition as well as higher operating costs from marketing and higher import cost on unfavourable currency fluctuations.

Change to Forecasts  Post results, we have cut our FY15 PATAMI forecasts by 17% to RM113.8m to mainly account for lower EBITDA margin of 7.0% in FY15 (-0.8ppts) after accounting for higher marketing and administration costs and imported CKD costs. We have also introduced our FY16 earnings estimates with key assumptions of revenue growth of 8% YoY and EBITDA margin of 7.5%.

 Rating Maintain UNDERPERFORM

Valuation  Post our earnings revision; we reduced our TP to RM2.80 (from RM3.00) as we switched our valuation method from PER methodology to PBV given its weaker earnings visibility as well as its waning earnings performance.

 Our valuation is based on a targeted 0.65x FY15 PBV (close to -2SD below its average 3-year mean forward PBV) and implies a FY15 PER of 16.0x.

Risks to Our Call  Stronger consumer sentiment.

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

Source: Kenanga