1H17 core PATAMI of RM35.6m (-4%) came in below our and consensus expectations, at 42% and 36%, respectively, due to lower-than expected associates’ contribution. Post results, we trim our FY17E/FY18E earnings assumptions by 8%/10% on expectation of lower earnings contribution from associates. As such, we lowered our TP to RM2.20 (from RM2.40, previously). Reiterate MARKET PERFORM.

1H17 hit by weaker associates’ contribution. The group reported 1H17 core PATAMI of RM35.6m (-4%) which is below our and consensus expectations at 42%. and 36%, respectively, due to lowerthan expected associates’ contribution. A first interim DPS of 1.5 sen was declared (1H16: 3.0 sen), which was below our expectation (of 7.0 sen for FY17).

YoY, 1H17 revenue slightly increased by 3% due to stronger performance from the lion’s share Motor Vehicles Trading segment (+2%) on exceptional sales of premium vehicles (Volvo XC90), and supported by volume sales in affordable value segment. Meanwhile, the auto parts manufacturing segment increased by 7% driven by higher production volume in both tyre assembly and wheel manufacturing plants. However, 1H17 core PBT decreased by 7% due to weak contribution from all the segment with marginal contribution in Motor Vehicles Trading segment (+1%) due to constraints in margins, extended losses in the auto parts manufacturing segment (-8%) on below-optimal production levels at the alloy wheel plant, and further hampered by lower earnings contribution from Associates (-8%) due to constrains in margins and joint-controlled entity, Autoliv Hirotako (-23%) on lower production volume.

QoQ, 2Q17 revenue decreased by 3% attributed to weak performance of the Motor Vehicles Trading segment (-5%) due to lower car sales volume in the current quarter which was, however, cushioned by the stronger performance in Auto Parts Manufacturing segment (+10%) attributed to higher production volume from its alloy wheel plant and improved pricing from the tyre assembly line. Correspondingly, 2Q17 PBT decreased by 12%, with lower contribution from Motor Vehicles Trading segment (-4%), and further hampered by lower earnings contributions from Associates (-11%) due to lower car sales volume and constraints in margin and joint-controlled entity, Autoliv Hirotako (-45%) due to lower production volume. However, the quantum of losses was narrowed in its Auto Parts Manufacturing segment (+28%) from losses of RM6.3m in 2Q17 to losses of RM4.5m in 1Q17, as various measures taken to improve production efficiency thus far are showing effect in its alloy wheel plant.

Leveraging on 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 due to higher operating and import costs on unfavourable currency fluctuations. In the meantime, while the auto parts manufacturing division is not expected to see a turn-around in the short-term given the operational de-leveraging at its Alloy Wheel plant, we believe stronger sales will be generated with the expected recovery in total industry numbers.

Post-results, we trimmed our FY17E/FY18E net earnings by 8%/10% on an expectation of lower earnings contribution from associates. As such, we lowered our TP to RM2.20 (from RM2.40, previously), based on an unchanged 10.0x PER on FY18E EPS. Reiterate MARKET PERFORM.

Source: Kenanga Research - 24 Aug 2017