9M17 core PATAMI of RM53.7m (-8%) is deemed within expectation as we expect stronger associates’ contribution in 4Q17 from the launch of third-generation Perodua Myvi and sales boosting year-end promotional events. No dividend was declared, as expected. No changes in earnings assumption. Maintain MARKET PERFORM with unchanged Target Price of RM2.20.

Expecting stronger 4Q17. The group reported 9M17 core PATAMI of RM53.7m (-8%) excluding the impairment on goodwill (RM10.8m) accounted for 69%/66% of our/consensus full-year estimates. However, the performance is deemed within expectation in anticipation of stronger associates’ contribution in 4Q17 from the launch of thirdgeneration Perodua Myvi and sales boosting year-end promotional events. No dividend was declared, as expected.

YoY, 9M17 revenue increased by 5% due to stronger performance from the lion’s share Motor Vehicles Trading segment (+4%) mainly on the sales of premium vehicles (Volvo XC90), and supported by volume sales in the affordable value segment. Meanwhile, the auto parts manufacturing segment sales increased by 7% driven by higher production volume in both tyre assembly and wheel manufacturing plants. Nonetheless, 9M17 core PBT plunged by 24% due to widened losses in the auto parts manufacturing segment (-25%) on belowoptimal production levels at the alloy wheel plant, and further hampered by lower earnings contribution from associate Perodua (-11%) due to constrains in margins. The negative impact was slightly cushioned by the improvement in joint-controlled entity, Autoliv Hirotako (+2%) on higher production volume and Motor Vehicles Trading segment (+14%) on higher margin from the sales in premium car segment.

QoQ, 3Q17 revenue surged by 16% attributed to stronger performance of the Motor Vehicles Trading segment (+17%) due to higher car sales volume aided by revised sales and marketing strategies. Meanwhile, the positive contribution from Auto Parts Manufacturing segment (+1%) was attributed to improved production volume from its alloy wheel plant and better pricing strategy from the tyre assembly line. Nonetheless, 3Q17 PBT plunged by 41%, mainly due to the widened losses in Auto Parts Manufacturing segment (-86%), attributed to higher cost of raw materials as well as additional provisions of c.RM2.5m on inventory and tooling. The negative impact was slightly cushioned by the improvement in Motor Vehicles Trading segment (+67%), Associates, Perodua (+2%) and joint-controlled entity, Autoliv Hirotako (+100%) attributed to stronger MYR against USD for the quarter.

Leveraging on Perodua. While we believe the Motor Trading Division will benefit from the strong market reception of the Perodua affordable variants, challenges will still persist from: (i) higher import and operating costs on unfavourable currency fluctuations, and (ii) strict hire-purchase approvals. The Auto parts manufacturing division is estimated to break even in FY18 with sales volume for alloy wheels expected to achieve at least 50% of the maximum capacity at c.375k units (maximum capacity at 750k units). Perodua maintains its 202k units target for FY17, with expected volume boost in 4Q17 with the launch of third-generation Perodua Myvi.

Maintain MARKET PERFORM with unchanged Target Price of RM2.20, based on unchanged 10.0x FY18E PER which is in line with - 1.0 SD of the 5-year mean PER. We think our valuation level is fair considering the weakness in its core business. Risks to our call include: (i) lower-than-expected car sales volume, (ii) unfavourable changes in forex, and (iii) lower-than-expected associates’ contribution.

Source: Kenanga Research - 23 Nov 2017