Period

2Q16/1H16

Actual vs. Expectations

1H16 slumped into the red with a loss of RM15.8m compared to our and consensus fullyear forecasts of RM202.8m and RM224.5m, respectively. The negative variance from our forecast is mainly due to higher-than-expected losses from the automotive segment.

Dividends

No interim dividend was declared. Key Result

Highlights

QoQ, 2Q16 revenue rose 10% to RM3.2b due largely to higher contribution from automotive (+14% QoQ) and property (+16% QoQ) divisions. Specifically, in the automotive segment, higher volume sales was led by Proton (+27% QoQ) followed by Isuzu (+8%), Suzuki (25%) and Mitsubishi (+26%). Pre-tax profit in 2Q16 rose >100% to RM52.7m from a low base in 1Q16, largely driven by 34%-owned Honda. Due to the narrowing losses at the automotive division, 2Q16 registered a PATAMI of RM3.9m compared to loss of RM19.7m in 1Q16.

YoY, 1H16 revenue declined 10% due mainly to lower contribution from automotive (-11%). Proton continued to disappoint with negative sales growth of 12% bringing total sale units to 51k in 1H16. Due to the losses at its automotive division which Proton accounts for 70-80% and lower contribution from services (-15% YoY), 1H16 registered a loss of RM15.8m compared to a profit of RM200.9m in 1H15.

Outlook

Earnings contributions are expected to come gradually from the RM7.55b AV8X8 contract while the property division is expected to contribute positively from several launchings. However, Proton is seen to continue losing market share resulting in the automotive division dragging down earnings.

Change to Forecasts

We cut our FY16E earnings by 36%-40% due to the poor set of results.

Rating & Valuation

Due to the erratic quarterly earnings, we are applying a 35% discount to its SoP valuation. Correspondingly, we downgrade our SoPderived target price from RM1.40 to RM1.06. Downgrade from Market Perform to Underperform.

Risks to Our Call

Upside risk: Better-than-expected performance in the automotive division.

Source: Kenanga Research - 27 Nov 2015