9M16 core PATAMI of RM58.5m was above our estimate but below consensus’. The stronger results were driven by higher associate earnings from Perodua, likely from the strong reception of the new Bezza. No dividend was declared, as expected. We tweak our FY16E/FY17E NPs (+10.0%/+4.2%) on better performance led by the Perodua Bezza. We raise our TP to RM2.49 (from RM2.37, previously) but maintain UNDERPERFORM given the limited upside.

9M16 results were above house expectation. 9M16 core PATAMI of RM58.5m was above our estimate but below consensus’ expectation, making up of 80% and 65% of the respective full-year core PATAMI estimates (due to our conservative revenue and associate forecasts from Perodua’s new model launch, the Perodua Bezza). No dividend was declared this quarter, as expected.

YoY, group revenue declined by 11.0% to RM1.2b due to the one-off revenue gain from the development of Menara MBMR of RM139.8m in 1Q15. Removing this item, the group would have registered a flattish decline (<1%) compared to the prior year. This is a net result of a decline in the lion’s share motor vehicles trading segment at RM1.1b (- 2%) due to weak market sentiment while being offset by 11.0% growth in the auto parts manufacturing segment to RM143.0m. The auto parts manufacturing segment was boosted by larger supply contracts booked earlier this year in conjunction with new models launches. Meanwhile, at the core PBT level (after excluding the contribution from Menara MBMR of RM33.5m), 9M16 core PBT decreased by 8%, dragged by further losses incurred by the auto parts manufacturing segment (-66%) due to below-optimal production levels. Meanwhile, the joint-controlled entity, Autoliv Hirotako was mired in an extended weaker performance (-48%) from lower production deliveries.

QoQ, 3Q16 top line grew slightly by 1% to RM431.9m. The impact of the stronger performance from the motor vehicles trading segment (+3%) led by the launch of the Perodua Bezza was mitigated by poorer sales from the auto parts manufacturing segment (-14%), where the latter is more vulnerable to declining total industry production level given the broad base exposure. 3Q16 PBT for the group grew by 11% on the back of higher contribution from associate earnings (i.e. Perodua Group).

Leveraging on the Perodua Bezza. The sales from the new Perodua Bezza sedan as well as recent model launches from other auto players are expected to offset the impact of the shrinking TIV sales for 2016, as seen in MAA’s statistics. While we believe the group will benefit from the strong market reception of the Perodua Bezza, challenges will still persist from: (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. In the meantime, while the auto parts manufacturing division is not expected to see a turnaround in the shortterm given the operations de-leveraging at its Alloy Wheel plant, we believe stronger sales will be generated with the expected recovery in total industry numbers.

Post-model updates, we upgrade our FY16E/FY17E net earnings by +10.0%/+4.2% in anticipation of stronger contributions from the Perodua Bezza as well as margins improvements from the auto parts manufacturing segments from a recovery in the industry. We maintain UNDERPERFORM but raised our TP to RM2.49 (from RM2.37, previously) based on an unchanged 10.0x PER on FY17E EPS

Source: Kenanga Research - 24 Nov 2016