1QFY22 CNP of RM236m (-13% YoY, -37% QoQ) came in below our/consensus expectation at 16%/18% of full-year estimate due to lower-than-expected China industrials segment contribution. As such, we cut FY22E/FY23E CNP by 21%/22% with further discount to reflect the tax on foreign-sourced income which is expected to be introduced soon as well as cautious business condition with the emergence of a new COVID-19 strain. Maintain OP with a lower SoP-derived TP of RM2.40 (from RM2.60). The saving grace is a dividend yield of 5.0%.

1QFY22 below expectations. 1QFY22 CNP of RM236m (-13% YoY, - 37% QoQ) came in below our/consensus expectation at 16%/18% of full-year estimate due to lower-than-expected China industrials contribution. No dividend was declared for the quarter as expected.

Results’ highlights, 1QFY22 core CNP decreased more (-13% YoY, - -37% QoQ) than revenue (-2% YoY, -6% QoQ) mainly due to unfavourable sales mix largely from lower Industrial sales and margin in China due to the slowdown in China’s construction activities as the previous corresponding period benefited from fiscal stimulus measures. Note that, the higher QoQ drop in CNP was mainly due to recognition of dividend income from BMW Malaysia of RM113m in 4QFY21 versus none this quarter as the dividends are paid in the 4Q of each year. In term of segments, the weak CNP growth was largely due to weaker Industrials profit contribution (-19% YoY, -35% QoQ) due to slower China construction activities and lower spare parts margin from Australasia (despite uptick in Australia mining and construction sectors). Automotive division sales were affected by the lockdown in Malaysia, but its profit was higher as its delivered more higher-margin models. On the other hand, its Logistics segment continued to be affected by the decline in bulk cargo throughput mainly on stiff competition. Its healthcare joint-venture business’ higher revenue and operating profit were offset by higher effective tax rate. Industrial segment’s order-book is at RM3,305m (+46% YoY, +1% QoQ) which fluctuates based on completion of work-order.

Outlook. Management noted that most of the group’s operations are in countries/territories that are not subjected to significant movement restrictions and the recovery in motor vehicle sales has generally been strong despite minor setback in global supply chain that could limit sales as there may not be sufficient inventories for sale for certain new models. Industrials segment is directly impacted by trade tensions with China on the mining sector in Australia which is likely to be manageable due to the robust coal demand from alternative markets in South Korea, Japan and elsewhere, while outlook for construction industry in New Zealand remains positive due to pent-up demand. China’s fiscal stimulus to boost infrastructure investment is expected to be rolled out in the near term to counter the emerging economic challenges.

We cut FY22E/FY23E CNP by 21%/22% to take account of slower-thanexpected China industrials segment contribution with further cut to reflect the tax on foreign-sourced income which is expected to be introduced soon as well as cautious business condition with the emergence of new variance of COVID-19 on overall business supply chain.

Maintain OUTPERFORM with a lower SoP-derived TP of RM2.40 (from RM2.60) which implied PER of 14.3x on FY22E EPS. The saving grace is a dividend yield of 5.0%.

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

Source: Kenanga Research - 30 Nov 2021