1Q16 core PATAMI of RM16.9m (>100% QoQ; -90% YoY) came in way below estimates, making up only 5% of both our and consensus’ estimates. Uninspiring earnings are attributed to: (i) Automotive segment incurring high import costs from unfavourable forex rates alongside poor sentiment driven sales, (ii) slowdown in foreign mining activities causing reduced equipment orders, and (iii) greater losses in the Oil & Gas segment due to lower utilisation of rigs. No dividend was declared as expected. We cut our FY16E/FY17E PATAMI by 43%/36% to account for lower earnings assumptions from Automotive, Oil & Gas and Equipment divisions. We maintain UNDERPERFORM with marginally higher TP of RM4.95 (from RM4.89) as we roll over our valuation base year to FY17E.

3M16 results below expectations, as the group reported 1Q16 PATAMI of RM16.9m, making up of 5% of our/consensus’ estimates. The negative deviations were mainly due to lower-than-expected earnings from: (i) automotive segment incurring high import costs from unfavourable forex rates and poor Toyota sales (-37% YoY to 10,216 units in 1Q16) on poor consumer sentiment, (ii) slowdown in construction and mining activities, and (iii) losses in the oil & gas segment due to lower utilisation of rigs (i.e. lesser demand in oil by oil majors due to weak oil prices).

YoY, 3M16 revenue fell by 32% dragged by weakness across all segments. Leading the drop in terms of absolute amount were the Auto, Equipment and Oil & Gas segments. At the group’s EBIT level, number was down by 94% due to low operational efficiency on ongoing high overhead costs.

QoQ, sales declined by 47% predominantly due to weaker sales in the Automotive segment (-54%). Contributing to Auto’s poor results were the heavy levels of pre-emptive purchases in anticipation of the vehicle price hike in Jan 2016. In addition, more stringent lending policies also discouraged the purchase of new vehicles. However, PBT recorded breakeven at RM21.1m vis-à-vis 4Q15 LBT of RM334.3m which was dragged by provisions for impairment of assets as well as forex losses resulting from deterioration of MYR. (Please refer to the overleaf for commentary on segmental performances) On the Automotive segment, management has guided lower combined total sales (Perodua, UMW Toyota) of 296k units (-7k units) in FY16 (vs. our latest forecast combined total sales of 290k units [-6% to 79k in Toyota with unchanged 216k Perodua units;) with unchanged sales volume assumptions from Perodua (216k units) but lower sales from UMW Toyota (80k units, -7k units) amidst ongoing lacklustre demand. Meanwhile, we continue to believe that margins will remain subdued, dragged by higher operating costs from marketing and high import cost on unfavourable currency fluctuations.

On the Oil & Gas segment, we expect headwinds in the Oil & Gas segment with oil prices expected to remain soft in the medium-term. With major oil companies implementing cost-cutting measures and delaying 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) are already out of charter contracts, exerting further downward pressure on the group’s nearterm earnings.

Post-results, we have reduced our FY16E/FY17E PATAMI by 43%/36% to account mainly for: (i) lower earnings from Automotive segment (mainly for lower Toyota sales per our latest revised 2016 TIV forecasts), (ii) lower equipment sales in lieu of the persistent weakness in the mining sectors, and (iii) greater losses assumptions in the Oil & Gas segment in FY16-FY17 (reduction of average rig utilisation and DCR assumptions).

Maintain UNDERPERFORM but upgrade our TP to RM4.95 (from RM4.89) as we roll over our valuation base year to FY17E, implying a 17.4x FY17E PER. 

Source: Kenanga Research - 25 May 2016