1Q16 core LATAMI of RM10.5m came in way below expectations as opposed to our/consensus full-year core NP estimates of RM65.7m/RM77.3m. The poor results were mainly driven by thinner margins from greater costing on inventories bought during the period of unfavourable forex. Post results, we reduce our FY16E/FY17E earnings by 22.8%/12.8% in consideration of: (i) softer automobile sales, and (ii) compressed operating margin. Maintain UNDERPERFORM with a lowered TP of RM1.76 (from RM2.15, previously) based on a lower targeted 0.4x FY17E BVPS (from 0.5x) close to -1.5SD below its average 3-year mean forward PBV.

1Q16 LATAMI of RM10.5m (-174.8%) was way below expectations, accounting for -16.0%/-13.6% of our/consensus estimates, which were also the first loss-making quarter for TCHONG in over 30 years. The disappointing results were primarily due to thinner operating margins resulting from heavier cost recognition of newer inventories, which were purchased during periods of unfavorable forex at the end of FY15. No dividend was declared during this quarter, as expected.

YoY, 1Q16 revenue declined by 6.6% to RM1.47b due to the weaker demand for automobiles. 1Q15 was also a higher base period due to more aggressive campaigning and promotional activities to clear inventory by auto players to avoid tax complications prior the implementation of GST. Core earnings fell by 174.8% to a core LATAMI of RM10.5m from weaker sales and compression of EBITDA margin from higher COGS (i.e. from 5.5% to 0.9%).

QoQ, 1Q16 topline fell by 3.0% as sales weakened due to preemptive purchases made during 4Q15 ahead of car price hikes in January 2016 as well as on seasonality. Similarly to the above, we attribute the decline in core earnings by 143.9% to compressed margin.

A turbulent time for TCHONG as the slimmer EBITDA margin trend is expected to carry on until year-end as the group attempts to clear more costly inventory. Still, the effective increase in selling prices at c.3% (after discounts) from April 2016 should provide some support in earnings. However, with the lack of new model launches until 2018, barring upcoming facelifts, consumer interest in the Nissan brand may dissipate, dampening the future sales outlook. Furthermore, we believe 2016 will continue to provide a challenging operating environment for the general automotive market with: (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.

Post-results, we trim our FY16E/FY17E NP by 22.8%/12.8% as we reduce our margins expectation on higher import costs as well as lower sales, with some margin normalisation expected in FY17.

We lower our TP to RM1.76 (from RM2.15 previously), as we roll over our valuation base from FY16E to FY17E with an ascribed BVPS of 0.4x (from 0.5x previously, which is close to -1.5SD below its average 3-year mean forward PBV) in lieu of a less than optimistic outlook for TCHONG. Our TP also implies FY17E PER of 22.4x. 

Source: Kenanga Research - 11 May 2016