1Q16 core PATAMI of RM18.4m came below estimates, making up of 21%/20% of our/consensus estimates, as a result of lowerthan- expected earnings from motor trading segment, automotive components as well as the jointly controlled entity- Autoliv Hirotako (AHSB). No dividend was declared as expected. We reduce FY16E/FY17E earnings by 19%/17% to account for lower motor trading earnings as well as lower earnings contribution from AHSB. We maintain our MARKET PERFORM call with a higher TP of RM2.37 from RM2.30 as we have rolled over to FY17E valuations based on an unchanged targeted 10.0x PER.

3M16 results below expectations, as the group reported 1Q16 PATAMI of RM18.4m, making up of 21%/20% of our/consensus estimates. The negative deviations were mainly due to lower-than-expected earnings from: (i) motor trading (weaker sales as well as slim trading margins), (ii) Auto parts Manufacturing (with negative EBITDA further dragged by high overhead costs) as well as (iii) jointly controlled entity-Autoliv Hirotako (lower production deliveries). No dividend was declared during this quarter, as expected.

YoY, for better comparison purpose, by excluding the revenue contribution from the development of Menara MBMR (RM139.8m) in 1Q15, the group’s revenue decreased by 17% on weaker sales in both Motor Vehicles trading (- 18%) and Auto parts manufacturing (-8%) segments. Looking closer at Motor Trading segment, while the weakness is attributable to the high base in 1Q15, which was boosted by strong promotional activities back then in avoidance of tax complications from the implementation of GST in Apr 2015, we also do not discount the possibility of weaker consumers’ appetite towards the big-ticket discretionary purchases, as echoed by the apparent slowing demand trend of passenger car loans as highlighted in the BNM monthly stats (during Jan-Mar16). Similarly, sales of Auto Parts Manufacturing were also lower in conjunction with overall lacklustre demand. Meanwhile, at the group’s bottomline level, core PATAMI decreased by 25% with lower earnings contribution from both associates (Perodua and Hino: - 8%, both on lower margins) as well as Joint controlled entity- Autoliv Hirotako, (-51%, on lower production deliveries).

QoQ, we attribute the sluggish 1Q16 revenue (-15%) to the high level of preemptive purchases made by consumers in anticipation of the price hike in 2016. Meanwhile, at the bottomline, core earnings dropped at similar quantum of 13% with higher associates earnings (+25%) as the saving grace to cushion the core LBIT of RM4.7m (vs. 4Q15 core EBIT of c.RM3m) as well as weaker jointly controlled Autoliv Hirotako (-40% on lower deliveries).

Automotive market continues to be shaky as the market is not emanating any signs of recovery. However, the tide may turn for MBMR in the 2H16 as new model launches such as the new Perodua sedan model may contribute fairly to the group’s performance. Nonetheless, 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 19%/17% as we reduce our margins expectation on higher import costs as well as lower sales, with some margin normalisation expected in FY17.

Maintain MARKET PERFORM but upgrade our TP to RM2.37 (from RM2.30 as we have rolled over to FY17E with an EPS of 23.7 sen based on an unchanged targeted 10.0x PER. 

Source: Kenanga Research - 19 May 2016