News

In a Bursa announcement, Tan Chong Motor Holdings (TCHONG) announced that TC Aluminium Castings Sdn Bhd (TCAC), its indirectly whollyowned subsidiary, proposes to enter into a related party transaction with APM Thermal Systems Sdn Bhd (APMT) to dispose TCAC’s assets used for the casting, machining and assembly of aluminium parts and components and other related assets for a total cash consideration of RM5.7m.

The Proposed Disposal is a streamlining measure to minimise losses from TCAC’s operations in lieu of high operating costs and decreasing sales.

Upon the completion of Proposed Disposal, which is subject to the approval of the shareholders of TCAC, APMT, along with the shareholders of their holding companies and TCHONG, the proceeds of RM5.7m will be utilised by TCAC for the repayment of borrowings.

Comments

We are NEUTRAL on the Proposed Disposal as we view TCAC’s aluminium casting business to be immaterial, given its historical contribution to the group’s revenue and earnings of <5.0%.

Outlook

We believe the challenging operating environment in 2015 will extend into 2016, to be dragged by: (i) lacklustre consumer sentiment on the back of rising cost of living, (ii) tighter financing conditions dampening vehicle purchases, and (iii) intense domestic competition as well as higher operating costs from marketing and higher import cost on unfavourable currency fluctuations.

Forecast

While the disposal gain will increase our FY16E NP/EPS by 6.5% (net of tax), we made no changes in our FY16E core NP as any potential earnings savings from the disposal of the entity is expected to be minimal.

Rating

Maintain UNDERPERFORM as we see no immediate re-rating catalyst in the near term.

Valuation

We made no changes to our TP of RM2.15. This is based on a targeted 0.5x ascribed on FY16 BVPS (close to -2SD below its average 3-year mean forward PBV). Our TP also implies FY16E PER of 21x.

Risks to Our Call

Recovery of consumer sentiment.

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

Source: Kenanga Research - 28 Apr 2016