• Hit with injunctions and lawsuits

• Marginally increases net gearing in worst case scenario

• May deepen FY17F loss if provisions were to be made

• Maintain NEUTRAL at unchanged TP of RM1.90 - pegged to trough valuation of 0.5x FY18F BV.

Hit with injunctions and lawsuits. TC Industrial Equipment Sdn Bhd (TCIE), a unit of Tan Chong, had previously entered into a series of agreements with Konsortium Transnasional and several other companies linked to the group for the lease and maintenance of vehicles. Konsortium Transnasional and the linked companies were owing to TCIE outstanding rentals and service bills amounting to RM32.9m. In July 2016, both parties agreed to a settlement of the amount by way of: (1) 16.9m in cash in several instalments (2) transfer of a piece of land in Bandar Ampang, Daerah Ulu Langat, Selangor, to TCIE for the settlement of the balance debt of RM16m. However, the debtors failed to make timely repayments and TCIE exercised its rights to repossess the vehicles leased to the debtors. Pursuant to this, the debtors are claiming: (1) an injunction to restrain TCIE from repossessing the vehicles, (2) an injunction from TCIE entering into any dealing with the Bandar Ampang land and a declaration that the value of the land is RM55.6m, (3) a repayment of compensation from the acquisition of part of the Bandar Ampang land, (4) repayment of a sum of RM23m.

Impact on the group. TCIE’s solicitors believe that the action are without any legal basis and will file an application to strike them out. In the worst case scenario that Tan Chong fails in its opposition of the RM23m claim, FY17F net gearing increases marginally from 54% to 55%. It is uncertain at this point whether Tan Chong had already made provisions for the amounts (of RM33m) owing to it by the debtors or the RM23m claim by the debtors. The former accounts for some 41% of Tan Chong’s FY17F net loss of RM81m.

Recommendation. We remain NEUTRAL and keep our BV-based (pegged to trough valuation of 0.5x FY18F book value) TP of RM1.90/share. Share price is already trading at depressed levels admittedly, but there is little catalyst for the stock in the near-term, especially given the weak earnings visibility and freeze in new launches. Uncertainties in regards to the issues with Konsortium Transnasional (and linked companies) may dampen share price in the near-term.

Source: MIDF Research - 21 Aug 2017