1HFY22 CNP of RM581m (-8% YoY) came in within our/consensus expectation at 51%/47% of full-year estimate. All operation segment sales are still in the state of recovery post lockdown, with motor vehicles segment continuing recording higher profit growth with sustainable sales of higher margin models. Currently, sales order backlog is stretched over one-month period, in line with gradual recovery in semiconductors chip supply. Maintain OP with SoP-derived TP of RM2.40. The stock offers dividend yield of 4.9%.

1HFY22 within expectations. 1HFY22 CNP of RM581m (-8% YoY) came in within our/consensus expectation at 51%/47% of full-year estimate. 1HFY22 dividend of 4.0 sen (1HFY21: 6.0sen) was declared in the quarter, within expectation.

YoY, 1HFY22 core CNP (-8%) decreased more than revenue (-4%) mainly due to unfavourable sales mix largely from lower Industrial segment sales (-35%) and margin (1HFY22: 3% vs. 1HFY21: 5%) in China due to the slowdown in China’s construction activities as the previous corresponding period benefited from fiscal stimulus measures. In term of business segments, the weak CNP growth was largely due to weaker Industrials segment profit contribution (-18%) due to slower China construction activities and lower spare parts margin from Australasia (despite uptick in Australia mining and construction sectors). Automotive division sales (-5%) were affected by the lockdown in Malaysia, but its profit was higher (+1%) as its delivered 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’s higher revenue and operating profit were offset by higher effective tax rate. Industrial segment’s orderbook is at RM3,969m (+49% YoY, +20% QoQ) which fluctuates based on completion of work-order.

QoQ, 2QFY22 core CNP surged 46% overshadowing weak sales (-1%) benefitting from recovery in margin for both Industrials and Motor Vehicles segments as 1QFY22 was impacted by the lockdown in Malaysia and Australia dollar forex variation which increased costs. Additionally, there was recognition of Logistics forex gain of RM5m compared to less than RM1m in 1QFY22.

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 due insufficient inventories of 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 which is expected to be rolled out in the near term to counter emerging economic challenges is seen to benefit its Industrial division.

Maintain OUTPERFORM with SoP-derived TP of RM2.40 which implied PER of 14.3x on FY22E EPS. The stock offers a dividend yield of 4.9%.

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

Source: Kenanga Research - 17 Feb 2022