FY18 core PATAMI of RM103.4m came in above our/consensus expectations at 119%/128% of full-year estimates due to higher-than-expected Automotive margin. TCHONG’s strategy of focusing more on product mix skewed towards higher-margin models is bearing fruits. We upgrade our FY19E core PATAMI by 14%, to reflect the stronger-than-expected Automotive margin. As such, we increased our TP to RM2.15, from RM1.70. Reiterate OP.

FY18 above expectations. FY18 core PATAMI of RM103.4m (compared to core losses of RM92.6m in FY17), came in above our/consensus expectations at 119%/128% of full-year estimates due to higher-than-expected Automotive margin. Interim DPS of 2.0 sen was declared for the quarter bringing FY18 DPS to 4.0 sen (FY17: 2.0 sen), as expected. The group typically paid its dividends in 2Q and 4Q.

YoY, FY18 revenue surged 12% despite slower growth in Nissan vehicles sales at 28,650 units (+6%), as per MAA statistics, which was attributed to its favourable sales mix as TCHONG was focusing more on higher margin models (higher price tag) of its popular MPV (all-new Nissan Serena), sports utility vehicle (Nissan X-Trail) and pick-up truck (Nissan Navara). Note that, its Automotive EBITDA margin rose 4.1ppt to 6.4% from 2.3% in FY17. Coupled with the stronger financial services segment’s EBIT contribution (+11%), and further supported by the favourable MYR against USD exposure, the group posted core PATAMI of RM103.4m, compared to core losses of RM92.6m in FY17.

QoQ, 4Q18 revenue plunged 26% in line with Nissan vehicles sales decreasing to 7,877 units (-11%), as per MAA statistics, as 3Q18 was buoyed by the zero-rated tax-holiday (June-Sept 2018). Nevertheless, the weak sales volume was mitigated by high margin models, especially all-new Nissan Serena S-Hybrid, which boosted its Automotive EBITDA margin by 4.2ppt to 10.0% from 6.1% in 3Q18. Overall, the group posted higher core PATAMI at RM44.1m, from core PATAMI of RM34.3m in 3Q18.

Outlook. TCHONG has shifted its strategy from volume-play to marginplay as it is focusing more on product mix skewed towards highermargin models. The all-new 2018 Nissan Serena S-Hybrid, is expected to sustain its car sales volume, for now. For 2019, TCHONG will be launching all-new 2nd-generation electric vehicles, Nissan Leaf in mid- 2019, and tentatively, will roll out other new models, based on market demand, where we expect the emergence of all-new Nissan Grand Livina (7-seater MPV) and face-lifted Nissan X-Trail. Moving forward, the group is expanding its Indochina operation given the larger market volume, and improving its profitability with margin expansion from the high-margin car models.

Upgrade FY19E core PATAMI by 14%. We upgrade our FY19E core PATAMI by 14%, to reflect the stronger-than-expected Automotive margin.

As such, we increased our TP to RM2.15 (from RM1.70), based on an unchanged 12x FY19E EPS at its -1.0SD of 5-year forward historical mean PER. Reiterate OUTPERFORM.

We like the stock for its: (i) strong turnaround in earnings after two consecutive years of losses with focus on high-margin vehicles, and (ii) expected expansion of its Indochina operation for larger market share volume.

Source: Kenanga Research - 26 Feb 2019