6M16 results came in below expectations. Negative deviations were: (i) weaker Auto segment dragged by softer consumer sentiment and higher import costs, (ii) slowdown in foreign mining activities, and (iii) greater losses in the O&G segment. No dividend was declared, which also missed. Post-results, we cut our FY16E/FY17E earnings by 52%/10% in favour of lower earnings assumptions mainly in the O&G segment. Maintain UNDERPERFORM with a lower TP of RM4.45 (from RM4.95, previously) based on SoP valuation.

6M16 results were below expectations, as the group reported 6M16 core NP of RM2.1m which missed our/consensus’ full-year core NP estimates of RM198.5m/RM220.9m. Negative deviations were mainly due to: (i) automotive segment facing high import costs from unfavourable forex rates and lower Toyota sales (-14% YoY at 22,779 units in 6M16) from stiff domestic competition with shrinking market share, (ii) slowdown in construction and mining activities, and (iii) prevailing losses in the oil & gas segment from lower rig utilisation rates, as demand by oil majors was affected by weak oil prices.

YoY, 6M16 revenue declined by 25% due to weakness across all segments. The auto segment declined the largest in absolute sales value (-21%) as poor consumer sentiment from higher living costs suppressed market demand for automobiles. Sales in the equipment segment fell by 30% amidst slowing construction and mining activities in Myanmar due to state government restrictions. Meanwhile, the Oil & Gas segment (-56%) was dragged by industry softness from weak oil prices, leading to lower rig utilisation by oil majors. In terms of PBT, the auto segment (-57%) saw compressed margins (-5 pts) from higher import costs from unfavourable forex rates while the Oil & Gas segment (-362%) yielded negative PBT margins of -61% due to high overhead costs caused by low operational efficiency from low rig utilisation. The underlying factors above led 6M16 PBT to record at RM65.9m (-88%).

QoQ, auto sales grew by 29% as sales figures normalised from a low base at 1Q16, where sales were previously discouraged by pre-emptive purchases prior to January 2016 in anticipation of vehicle price hikes. Oil & Gas revenue increased by 48% on better rig utilisation. While PBT recorded an impressive growth of 113%, core PATAMI recorded losses on higher taxation and zakat with certain expenses not allowable for tax purposes and loss position in some subsidiaries.

On the Auto Segment, management guided lower combined sales for Perodua and UMW of 286k units (-10k units), which is broadly in line with our sales volume assumptions. While 2H16 is expected to be challenging for the automotive sector, the Perodua Bezza is expected to thrive in the market for its attractive specifications within its competitive price range. Meanwhile, margins from Toyota are expected to be low amidst prevailing weakness in forex. On the Oil & Gas segment, we continue to anticipate weakness in the short to medium term in lieu of softness and uncertainty in oil prices with oil majors expected to be less aggressive with their exploration efforts. With five rigs (NAGA 2, 3, 4, 5 and 7) not being chartered and another one only commencing charter in 4Q16, high overhead costs with lower returns will continue to exert stress on the group’s FY16 earnings.

Post-results, we have cut our FY16E/FY17E PATAMI by 52%/10% 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) widening loss expectations in the Oil & Gas segment in 2H16-FY17 from lower average rig utilisation.

Maintain UNDERPERFORM but downgrade our TP to RM4.45 (from RM4.95) based on our SoP valuation to FY17E revised fundamentals, implying a 17.5x FY17E PER.

Source: Kenanga Research - 30 Aug 2016