FY17 core losses (CNL) of RM83.9m came in within our core losses expectation of RM83.4m. However, consensus core losses forecast of RM93.7m was higher, which we believe is due to the lower-than-expected margin. Maintain MARKET PERFORM and cut our TP from RM1.90 to RM1.80 based on lower 0.41x FY18E BVPS implying -0.5 SD of its 3-year mean historical PBV.

FY17 within our expectation. FY17 core losses (CNL) of RM83.9m came in within our core losses expectation of RM83.4m. However, consensus core losses forecast of RM93.7m was higher, which we believe is due to the lower-than-expected margin. An interim DPS of 1.0 sen was declared for the quarter, bringing FY17 DPS to 2.0 sen, as expected.

YoY, FY17 revenue plunged 21% as Nissan car sales declined to 26,588 units (-35%) as per MAA statistics. Sales were only from the outgoing models, primarily B-segment Nissan Almera, popular sports utility vehicle, Nissan X-Trail and pick-up truck, Nissan Navara NP300. Correspondingly, at EBIT level, the group posted losses of RM18.7m compared to a profit of RM18.7m in FY16 attributed to the unfavourable USD/MYR forex rates which resulted in higher CKD costs (as at FY17, the average of USD/MYR at RM 4.2996/USD compared to RM4.1411/USD as at FY16). In addition, marketing and promotional expenses were also higher as the group strive to maintain the Nissan brand’s presence in a diminishing auto market. Consequentially, FY17 CNL losses widened to RM83.9m from RM45.8m in FY16.

QoQ, 4Q17 revenue growth was flat despite Nissan car sales declining to 6,376 units (-12%) as per MAA statistics due to the favourable sales mix which saw higher sales of its popular sports utility vehicle, Nissan X-Trail and pick-up truck, Nissan Navara NP300 which entail higher sales price. Nonetheless, at EBIT level, the group registered profit of RM27.1m compared to the losses of RM12.6m in 3Q17 attributed to the stronger USD/MYR rates (as at 4Q17, the average USD/MYR was at RM4.1717/USD compared to RM4.2837/USD as at 3Q17). Consequentially, 4Q17 CNL losses narrowed to RM6.9m from RM15.8m in 3Q17.

Outlook. We foresee that the recent strengthening of MYR against USD will be able to cushion its losses (the group is estimated to have 80% exposure to USD of its imported costs where every 1% appreciation in USD/MYR will improve our FY18E CNP by 15% and vice versa). However, TCHONG car volume sales will only be able to register low single-digit growth underpinned by the outgoing models to drive the volume. Moving forward, the group is targeting to expand its Indochina operations given the larger market volume and expect revenue contribution breakdown to be on 50%:50% basis for domestic:Indochina markets under its long-term strategy (from the current 70%:30% split).

Downgrade FY18E CNL to RM30.4m. We downgrade our FY18E CNL to RM30.4m from CNL of RM29.0m on expectation of lower margin. On the other hand, we introduce FY19E CNL at RM11.7m.

Maintain MARKET PERFORM with a lower TP of RM1.80 based on the lower 0.41x FY18E BVPS implying -0.5 SD of its 3-year mean historical PBV (previously, from TP of RM1.90 based on 0.45x FY18E BVPS implying -0.5 SD of its 3-year mean historical PBV). Risks to our call include: (i) higher-than-expected car sales volume, and (ii) unfavourable forex.

Source: Kenanga Research - 28 Feb 2018