9M18 core PATAMI of RM560m (+1%) came in within our expectation at 75% but below consensus expectation at 64% of full-year estimates which we believe this was due to lower-than-consensus-expected motor vehicles sales. Maintain MARKET PERFORM with an unchanged TP of RM2.70 based on Sum-of-Parts (SoP).

9M18 within our expectation. The reported 9M18 core PATAMI of RM560m (+1%) excluding one-off items namely (i) impairment on PPE (RM68m), (ii) impairment on receivables (RM59m), (iii) write-down of inventories (RM169m), (iv) gain on properties disposal (RM165m), (v) gain on disposal of associates (RM5m), and (vi) net foreign exchange gain (RM21m) came in within our expectation at 75%. However, this is below consensus expectation at 64% of full-year estimate which we believe is due to lower-than-expected consensus motor vehicles sales. No dividend was declared as expected. The group typically paid its dividend on 2Q and 4Q.

YoY, 9M18 revenue increased by 10% underpinned by: (i) Industrial (+31%) due to higher equipment deliveries and product support sales to the construction and mining sectors in Australia, (ii) Logistics (+13%) on higher general cargo and container throughput, and (iii) Motor Vehicles (0%) from the strong BMW sales in its major region (China, HK, Macau and Taiwan), more than off-setting the cessation of BMW distributorship in Vietnam and distribution for Peugeot and Citroen in Australia and New Zealand. Correspondingly, excluding one-off items, its core PBIT surged 39% underpinned by stronger core PBIT across the board namely: (i) Industrial (+62%) from the favourable equipment sales mix and lower provision for aged inventories, (ii) Logistics (+69%) from the increase in throughput activities, and (iii) Motor Vehicles (+15%) from the higher sales volume and margins in its major region as well as divestment of loss-making operations. Meanwhile, its core PATAMI increased only by 1% due to the adjustments in taxation from the divestment of discontinued operation.

QoQ, 3Q18 revenue declined by 6%, dragged by Motor Vehicles (-11%) from the cessation of Vietnam, Australia and NZ businesses as well as Logistics (-14%) from the CNY holidays on reduced operating time. Correspondingly, excluding one-off items, its core PBIT decreased 17% mainly from Industrial (-47%) due to the charge-out of parts for service jobs, which are no longer recoverable in Australia as well as reduced operating time in Logistics (-28%). Filtered down from core PBIT, 3Q18 core PATAMI declined at a slower rate of 7% due to lower effective tax rate of 29.5% compared to 38.4% in 2Q18.

Outlook. The Industrial division’s product support operations in Australia continue to show growth as a result of the recovery of the mining business, whilst the China operations are benefiting from strong demand from the construction industry. Whereas, the Motors division’s performance is expected to improve with higher sales from new model launches in the coming quarters (Range Rover Velar, BMW X3, BMW M5 and MINI Cooper Countryman). Nevertheless, the Motors operations continue to be impacted by strong competition and cautious consumer sentiment. On the other hand, Port operations continue to face competition from other ports as well as environmental controls implemented by local authorities limiting the operating time of the ports.

Maintain MARKET PERFORM with an unchanged target price of RM2.70 based on Sum-of-Parts to capture the emerging value from its Motor, Industrial, and Logistics divisions.

Risks to our call include: (i) lower-than-expected car sales volume, and (ii) unfavourable forex.

Source: Kenanga Research - 28 May 2018