FY16 core PATAMI of RM74.0m (+1% YoY) excluding one-off impairment was below estimates, making up 93%/87% of our/consensus estimates due to higher-than-expected operating expenses. FY16 DPS of 6.0sen was declared, within expectations. While Perodua has attractive lines of affordable variants, the lacklustre consumer sentiment could continue to curb on the demand. We maintain UNDERPERFORM call with a lower TP of RM2.42 based on an unchanged 10.0x PER on FY17E EPS.

FY16 results came in below expectation. FY16 core PATAMI of RM74.0m (+1% YoY) excluding impairment of goodwill and impairment of property, plant and equipment was below our estimate and consensus expectation, making up of 93% and 87% of the respective full-year core PATAMI estimates (due to higher-than-expected operating expenses). 2nd interim DPS of 3.0sen was declared for 4Q16, lifting the FY16 DPS to 6.0sen, within expectations.

YoY, group revenue declined by 7.4% to RM1,680.7m as the lion’s share motor vehicles trading segment declined by 1.6% to RM1.478.6m due to weak market sentiment. The auto parts manufacturing segment, however, was boosted 16.1% from large supply contracts with the emergence of new models such as, Proton Saga and Proton Persona. FY16 core PBT decreased by 39.0%, with the auto parts manufacturing segment (-103.2%) extending its losses due to below-optimal production levels. Additionally, the one-off impairment of RM30.3m further dragged PBT numbers. Subsequently, the joint-controlled entity, Autoliv Hirotako was mired in an extended weaker performance (-24.7%) from lower production deliveries. However, the negative impacts from the abovementioned were cushioned by the improved earnings contributions from associate (+28.1% YoY) thanks to stronger sales from Perodua.

QoQ, 4Q16 top line grew by 3.7% to RM447.7m. The impact of the stronger performance from the motor vehicles trading segment (+1.5%), led by the launch of the Perodua Bezza, further aided by increase delivery in auto parts manufacturing segment (20.7%). 4Q16 PBT posted worse-than-expected decrease of 70.0%, due to provisions of slow moving stocks and receivable in Motor Vehicles Trading segment (- 176.5%), and below-optimal production levels from auto parts manufacturing segment (-112.2%). These losses, however, were mitigated by the increase in sales of Associates, Perodua (59.0%) and increase in delivery in the joint-controlled entity, Autoliv Hirotako (301.1%).

Leveraging on the Perodua. While we believe the group will benefit from the strong market reception of the Perodua affordable variants, challenges will still persist from: (i) lacklustre consumer sentiment on the back of rising cost of living, (ii) tighter financing conditions, and (iii) intense domestic competition as well as higher operating costs 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 short-term 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 downgrade our FY17E net earnings by 2.7% on anticipation of slight decrease in margins. Meanwhile, we introduce our FY18E assumptions with core earnings of RM107.4m in anticipation of increased sales volume from associates, Perodua. We maintain UNDERPERFORM call with a lower TP of RM2.42 (from RM2.49, previously) based on an unchanged 10.0x PER on FY17E EPS.

Source: Kenanga Research - 23 Feb 2017