1HFY20 plunged further into the red, with core losses of RM327m compared to core profit of RM257m for 1HCY19, and compared to our full-year core losses expectation of RM191m and consensus core profit of RM87.0m. We deemed the results to be within our expectation, as we expect recovery in 2HFY20 from the sales tax exemption and new launches. No changes to FY20E numbers, but we upgrade our FY21E CNP by 39% on expectation of spill-over delivery of 4QCY20 all-new launches. Maintain UP with a higher Sum-of-Parts (SoP) derived-TP of RM1.80 (from RM1.30).

YoY, 1HFY20 plunged further into the red, with core losses of RM327m compared to core profit of RM257m for 1HCY19. This was mainly due to lower overall sales (-31%) impacted by the COVID-19 pandemic and further worsened by the unfavourable forex movement which caused the group to recognise forex losses on translation of payables and borrowings denominated in foreign currencies. Automotive segment sales (-36%) were affected by the business closure during MCO with Proton sales at 37,117 units (-9%) and Honda sales at 17,361 units (-61%). Services segment registered weaker sales (-22%) from (i) Pos Malaysia’s aviation division which suffered losses from flight cancellations during this outbreak with closed international borders, but cushioned by recovery in courier and mail business from stronger e-commerce and online marketplace demand as well as (ii) weaker performance from banking (Bank Muamalat) as a result of financing moratorium. The revenue from property sector (-34%) was mainly from construction-related projects and impacted by the temporary closure of construction sites due to MCO. Note that, our 1HFY20 core losses exclude: (i) modification losses on financing moratorium (RM60.6m), (ii) impairment loss on PPE (RM54.6m), and (iii) others disposal gain (RM23.1m).

QoQ, 2QFY20 continued to be in the red with core losses of RM214m compared to core losses of RM113m for 1QFY20 mainly due to lower overall sales (-27%) impacted by the COVID-19 pandemic largely from Automotive segment. Automotive segment sales (-42%) were affected by business closure during MCO with Proton sales at 15,389 units (-29%) and Honda sales at 6,135 units (-45%). The revenue from property sector (- 15%) was mainly from construction-related projects and impacted by the MCO. This however was cushioned by recovery in services segment sales (+5%) especially from Pos Malaysia, with stronger e-commerce and online marketplace demand.

Outlook. During this sales tax exemption, the group’s marques are expected to boost their sales performance in 2HCY20 by featuring new or revised models. Volkswagen launched Arteon, Tiguan Allspace SUV and the Passat R-Line, while Audi launched the Q3 Sportback. Proton will launch the Proton X50 (Geely Binyue) soon. Honda has launched the face lifted BR-V in July 2020 and will launch the all-new Honda City soon. Despite the challenging environment, Pos Malaysia’s on-going transformation efforts will augment the improved tariff rates and the growing demand for e-commerce. Other businesses in the group will continue to adapt to the so-called “new normal” environment to ensure financial sustainability, against the backdrop of changes in consumer behaviour.

New launches spilling over to 2021. We upgrade our FY21E CNP by 39% on expectation of booking spilling over to next year especially with the highly anticipated Proton X50 and Honda City 2020 launches in 4QCY20.

Maintain UP but with a higher Sum-of-Parts (SoP) derived-TP of RM1.80 (from RM1.30) with corresponding upgrade in our FY21 earnings estimates. Our TP implies a PER of 17x on FY21E EPS.

Key risks to our call are: (i) higher-than-expected car sales volume, and (ii) higher-than-expected associates’ contribution.

Source: Kenanga Research - 1 Sept 2020