1H16 core PATAMI of RM37.2m was within our but below consensus’ full-year expectations. However, interim net DPS of 3.0 sen came in below expectation. Although the Perodua Bezza will likely mitigate some weakness in the trading segment’s performance, we believe any quantum leap in earnings could only be seen earliest in 2017 with a turnaround of its auto parts manufacturing segment. Post-model updates, we tweak our FY16E/FY17E NP (+0.3%/+0.7%) and cut our FY16E/FY17E DPS assumption to 7.0 sen. Maintain TP of RM2.37 but downgrade to UNDERPERFORM in consideration of the recent price rally.

1H16 results within house expectation. 1H16 Core PATAMI of RM37.2m was within our but below consensus’ expectations, making up of 52% and 42% (possibly due to overly bullish forecasts in the auto parts manufacturing segment) of the respective full-year core PATAMI estimates. Dividend payout of 3.0 sen per share during the quarter is below our expectation of an 11.0 sen for the full-year.

YoY, top line fell by 17% to RM801.0m due to the one-off revenue gain from the development of Menara MBMR of RM139.8m in 1Q15. Removing this item, the group would only experience a minor decline of 3% in revenue. This is mainly attributed by the weaker sales on the motor vehicles trading segment at RM706.9m (-4%), likely a result of poor consumer sentiment from higher costs of living and tighter lending guidelines during the year. Meanwhile, at the core PBT level (after excluding the contribution from Menara MBMR of RM33.5m), 1H16 core PBT decreased by 31% due to lower earnings contribution from the associates, Perodua (-12% unit sales, with lower margins possibly due to inflated costs from unfavorable exchange rates). Meanwhile, joint-controlled entity- Autoliv Hirotako also saw weaker performance (-48%) with lower production deliveries.

QoQ, 2Q16 sales improved by 14% to RM427.1m. This was led by the recovery of the motor vehicle trading segment (+10%) in 2Q16 from a poor 1Q16 where demand was weak due to high levels of pre-emptive purchases made by consumers during 4Q15 in anticipation of the hike in automobile prices effective 1Q16. Auto parts manufacturing also experienced a sizeable growth of 51% thanks to a larger supply contract booked. 2Q16 PBT grew by 8% in lieu of the higher contribution from the motor vehicle trading segment.

While the automotive market is expected to be challenging, we believe the sales from the launch of the new Perodua Bezza sedan is expected to offset the impact of the shrinking TIV sales for 2016, as seen in MAA’s statistics. However, Auto Parts Manufacturing is not expected to see a turnaround anytime soon given that operation is de-leveraging at its Alloy Wheel plant. On the macro side, we believe the year will continue to pose 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-model updates, while we made no changes to our earnings drivers, our FY16E/FY17E NP tweaked +0.3%/+0.7% for house-keeping purposes. Meanwhile, we also reduce our FY16E/FY17E dividend per share assumption to 7.0 sen.

We maintain our TP of RM2.37 (based on an unchanged 10.0x PER on FY17E EPS) but downgrade to UNDERPERFORM in consideration of the buying rally from RM1.97 to RM2.65 in Jun-Aug’16 which brought the stock’s price to hover at <3% upside of our prescribed TP.

Source: Kenanga Research - 26 Aug 2016