Period

3Q15/9M15

Actual vs. Expectations

Below expectations. The group reported 3Q15 normalised PATAMI of RM81.7m (+54% QoQ and -61% YoY), bringing 9M15 core PATAMI to RM307.1m (-53%) which made up only 66%/59% of our/consensus’ full-year earnings estimates.

Note that the 9M15 normalised PATAMI has been adjusted by excluding the non-core items totalling RM60.0m which consists of: (i) impairment losses of receivables amounting to RM3.7m, (ii) provision for write-down of inventories amounting of RM17.3m, and (iii) provision for impairment losses of assets amounting to RM39.2, as well as others non-core items amounting to RM0.2m.

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) its 38%-associate Perodua (which we believe might have been dragged by start-up losses in Perodua’s new engine plant on top of the adverse currency fluctuations), and (ii) its Oil & Gas segment (discounted charter rates and lower rig utilisation in the 3Q2015).

Dividends

As expected, no dividend was declared for the quarter under review. Key Result

Highlights

YoY, 9M15 revenue decreased by 9% owing to lower revenue contributions from the Automotive, M&E segment and other segment (which we believe to be non-core O&G). Compounded by lower EBIT margins of 5.1% (-5.6ppts) which was dragged mainly by higher costs arising from unfavourable forex in Automotive segments and discounts on time charter rates and additional OpEX (of uncontracted NAGA 7) in Oil & Gas segment, EBIT declined by 56%.

QoQ, despite sales weakness seen in the lion’s share contributor- Automotive segment (-5%), the group’s revenue still inched up by 1% compensated by better sales in all other segments. Positively, core PATAMI rebounded 54% which we believe was helped mainly by better operational efficiency in Equipment segment. Notably, headline PBT of Equipment segment jumped 91% in tandem with higher revenue of equipment, parts and services from Myanmar and Papua New Guinea.

YoY, Automotive: 9M15 revenue decreased by 11% 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 47% with PBT margin corroded by 5.8ppts which we believe was mainly due to: (i) higher A&P costs amidst ongoing aggressive sales promotion activities, and (ii) higher imported CKD costs on unfavourable forex.

YoY, Equipment: 9M15 revenue jumped by 12% boosted by the resumption of jade mining activities in Myanmar as well as higher parts and services revenue in Papua New Guinea. With better operational efficiency coupled with a tax incentive given by the authority to purchase equipment in Singapore, PBT soared by 42%.

YoY, Oil & gas: 3Q15 revenue decreased by 16% owing to lower time charter rates and rig utilisation amid the sluggish Oil & Gas segment in the low oil price environment. Coupled with the lower operational efficiency, PBT dropped by 85%.

YoY, M&E. 9M15 revenue decreased 6% owing to its weaker auto components business in Malaysia. Coupled with higher raw materials costs, which are mainly in USD, segmental PBT decreased by 85%.

Outlook

On the Automotive segment, we are still keeping our conservative combined total sales (Perodua, UMW Toyota) of 293k units (-2% YoY), vs. management’s forecast of 298k units in FY2015 with unchanged sales volume assumptions from Perodua (205k units, mainly driven by Perodua Axia and MyVi) and UMW Toyota (88k units) amidst the lack of new attractive models as well as the weaker sales performance in 1H15. Meanwhile, we believe margins will continue to be suppressed, dragged by higher operating costs from marketing and higher import cost on unfavourable currency fluctuations.

For the Oil and Gas segment, we expect headwinds with oil prices expected to remain soft in the medium-term. 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) have already run out of charter contracts, exerting further downward pressure on the Group’s near-term earnings.

Change to Forecasts

Post-results, we have reduced our FY15E-FY16E PATAMI by 13%-19% to account mainly for: (i) lower EBITDA margin (to account for higher costs in FY15-FY16) for Automotive segment as well as its 38%-owned associate Perodua, (ii) earnings losses assumptions from Oil & Gas segment in FY15-FY16 (reduction on average rig utilisation to 44.0%/41.0% in FY15/FY16 from 50%/69% previously due to anticipation of non-renewal of expired drilling contracts by its major regional clients, i.e. PTTEP and PETROVIETNAM. Meanwhile, DCR assumption for our rigs are maintained at USD100,000/day which is consistent with the going rate in the market.

Rating

Downgrade to UNDERPERFORM

Valuation

Post-earnings revision, our SoP-derived TP has been reduced to RM6.73 from RM8.93 as we switched our PER valuation on its Oil & Gas segment (from previously 10.0x FY16 PER) to 0.5x PBV. Meanwhile for other segments, we ascribed a 12.0x PER which is -2SD below its 3-year PER mean to the total SoP.

Risks to Our Call

Higher-than-expected vehicle sales and margins.

Earlier than expected recovery in Oil & Gas segment.

Better than expected drilling margins.

Source: Kenanga Research - 27 Nov 2015