FY20 CNP of RM1,040m (+9% YoY) came in above our/consensus expectation at 107%/112% of full-year estimate due to higher-than-expected industrials contribution. As such, we increased our FY21E CNP by 19% and our TP to RM2.30 from RM1.75. We expect the industrials segment’s stronger momentum to be boosted by increased infrastructure spending, offsetting cautious consumer spending for motor vehicles. Upgrade to MP from UP.

FY20 above expectations. FY20 CNP of RM1,040m (+9% YoY) came in above our/consensus expectation at 107%/112% of full-year estimate due to higher-than-expected industrials contribution. A 2nd Interim DPS of 7.0 sen and Special DPS of 1.0 sen was declared for the quarter, bringing FY20 DPS to 10.0 sen (FY19: 10.0 sen), as expected.

YoY, FY20 core CNP increased by 9%, in tandem with the higher group sales (+2%), despite lockdown measures in certain countries. The strong CNP was mainly contributed by the Industrials segment PBT (+23%), which more than offset other segments’ weaker contribution as government measures in both China (+13%) and Australasia (+32%) to boost spending on infrastructures have been augmented with additional stimulus packages. The Australian mining industry remained strong and operational during the MCO, being categorized as an essential service. Management noted that the lower Industrials order-book of RM2,222m (-9%) is not a concern as it fluctuates based on completion of work order. On the other hand, the lower motor vehicles segment PBT (-3%) contribution was due to lower global sales at 79,241 units (-9%) during the pandemic. Logistics’ core PBT (-65%) continued to suffer under a tough trading environment.

QoQ, 4QFY20 core CNP surged 106% mainly due to: (i) recognition of dividend income from BMW Malaysia at RM120m versus none in 3Q as it receives dividends only in the 4Q each year (4QFY19: RM135m), (ii) lower effective tax rate at 33.9% (3QFY20: 48.5%) including the recognition of deferred tax credit arising from the change in RPGT rates in Malaysia, and (iii) strong mining industry under Industrials segment (+7%) with additional incentives from Caterpillar division. Despite lockdown measures in the quarter, there were signs of recovery post lockdown for the Motor Vehicles segment especially from China as measures to boost auto sales has been put in place by China’s commerce industry. The Malaysian side also shown improvement during the SST-exempted period.

Outlook. Management noted that government measures to increase infrastructure spending would support equipment sales of the Industrial division while fiscal incentives such as the sales tax exemption for car sales in Malaysia would help bolster sales. However, the risks from trade tensions remain high, which may lead to supply chain disruptions or changes in purchasing preference. Despite volatility in order-book, the Industrial division in Australia continued to show growth driven by the mining industry recovery. The Motors operation will continue to be impacted by strong competition, whereas its Port operation will be facing competition from other ports especially with the Chinese government rationalizing ports operations to create a larger ports entity.

Increase FY21E CNP by 19%. We increased our FY21E CNP by 19% to reflect the stronger industrials segment contribution. Additionally, we introduce FY22E CNP of RM1,196m (+2%).

Upgrade to MP from UP with a higher SoP-derived TP of RM2.30 (from RM1.75) on account of raised estimates of industrials and motor contributions which implied PER of 13x on FY21E EPS. Risks to our call include: (i) lower-than-expected car sales volume, and (ii) lower-than-expected industrials contribution.

Source: Kenanga Research - 28 Aug 2020