Period

2Q15/ 1H15

Actual vs. Expectations

Below expectations. The group reported 2Q15 normalised PATAMI of RM70.4m (-60% QoQ and YoY), bringing 1H15 core PATAMI to RM244.0m (-37%) which made up only 32% of both our and the consensus full-year earnings estimates.

Note that the 1H15 normalised PATAMI has been adjusted by excluding the non-core items totalling –RM10.4m which consists of: (i) impairment losses of receivables amounting to RM5.7m, (ii) provision for write down of inventories amounting of RM7.0m, (iii) reversal of impairment of assets/investments amounting to RM21.1m, as well as others non-core items of RM18.7m.

The negative deviations were lower-than-expected earnings mainly from: (i) the Automotive segment (weaker margins from higher CKD costs and aggressive A&P activities), (ii) the Oil & Gas segment (discounted charter rates and lower rig utilisation in the 2Q15), and (iii) greater losses from Other segment (which we believed to be non-core O&G).

Dividends

As expected, an interim single-tier dividend of 10.0 sen per share was declared. Key Result

Highlights

YoY, 1H15 revenue decreased by 11% owing to lower revenue contributions from the Automotive, M&E segment and other segment (which we believe to be non-core O&G). Compounded with lower EBIT margins of 6.8% (-4.0ppts) which was dragged mainly by higher costs arising from unfavourable forex in Automotive segments and discounts on time charter rates and additional opex (of NAGA 7) in Oil & Gas segment, EBIT declined by 44%.

QoQ, despite weakness seen across Equipment, O&G, M&E and other segment, revenue still climbed up by 8% with Automotive segment being the saving grace (+36% thanks to its aggressive marketing programmes). PBT, however, dropped by 35% with gains from Automotive segment (+13%) negated by slimmer PBT across Equipment, O&G, M&E and higher losses in others segment (which we believe dragged by non-core O&G segment).

YoY, Automotive: 1H15 revenue decreased by 15% as Toyota’s prime position in the passenger vehicle segment lost ground to Honda due to the latter’s attractive model launches, particularly in the B segment. Meanwhile, segmental PBT dropped steeper by 39% with PBT margin corroded by 4.2ppts which we believe was mainly due to: (i) higher discounts given to clear stock prior to GST implementation in 1Q15, and (ii) higher imported CKD costs on unfavourable forex.

YoY, Equipment: 1H15 revenue jumped by 13% boosted by pent-up demand for equipment, parts and services pre- GST implementation in 1Q15 as well as the resumption of jade mining activities in Myanmar. With better operational efficiency coupled with tax incentive given by the authority to purchase equipment in Singapore, PBT soared by 41%.

YoY, Oil & gas: 2Q15 revenue decreased by 23% owing to lower time charter rates and lower rig utilisation amid the sluggish Oil & Gas segment in the low oil price environment. Coupled with the lower operational efficiency, PBT dropped by 88%.

YoY, M&E: 2Q15 revenue came in weaker at RM165.4m (- 12%) mainly due to lower sales from the auto-component manufacturers, especially on the four wheelers products. At the PBT level, with the lower plant utilisation coupled with the higher expenses from the Indian operations, segment PBT merely breakeven at RM0.4m (vs RM11.9m a year ago).

Outlook

For FY15, we are expecting its Automotive segment to register a lower combined total sales (Perodua, UMW Toyota) of 293k units (-2% YoY), vs. management’s forecast of 298k units with unchanged sales volume assumptions from Perodua (205k units, mainly driven by Perodua Axia and MyVi) and UMW Toyota (lowered to 88k units) amidst the lack of new attractive models as well as the weaker sales performance in 1Q15.

On the Oil and Gas segment, we expect headwinds in the Oil & Gas segment with oil prices envisaged to remain soft. With major oil companies implementing cost-cutting measures and delaying the capital expenditure, we expect continual downward pressure on the charter rates at least in the medium-term. Moreover, four rigs (Naga 2, 3, 5 and 6) are expected to run out of charter contracts in FY15, exerting further downward pressure on the groups near-term earnings.

Change to Forecasts

Post-results, we have reduced our FY15E-FY16E PATAMI by 25%-38% to account mainly for: (i) lower EBITDA margin (to account for higher costs in FY15) for Automotive segment, (ii) lower earnings from Oil & Gas segment (reduction on average rig utilisation to 50%/69% in FY15E/FY16E from 64%/73% previously and lower average charter rate of USD104,229/day from USD135,000/day previously in view on lower rig count by oil majors expected coupled with oversupply in the Jack up rig market), and (iii) greater losses from other noncore O&G Segment.

Rating

Maintain MARKET PERFORM

Valuation

Post-earnings revision, our SoP-derived TP has been reduced to RM8.93 from RM11.17 (which implies 16.0 FY16 PER, which is close to its -1SD below its 3-year PER mean) together with lower PER ascribed on Automotive (from 13x to 11x which is now being the sector forward PER) and Oil & Gas segment (from 13x to 10x which is the average forward PER of big cap Oil & Gas stocks).

Risks to Our Call

Higher-than-expected vehicle sales.

Earlier than expected recovery in Oil & Gas segment.

Better than expected drilling margins.

Source: Kenanga Research - 27 Aug 2015