KEY INVESTMENT HIGHLIGHTS

• Slipped into losses in 1Q20 given Covid19 pandemic

• Expecting a weaker second quarter before a recovery

• New Almera an important catalyst for earnings improvement going forward, but potential near-term drag from run-out of current generation Almera

• Maintain NEUTRAL at unchanged TP of RM1.15

Slipped into the red. Tan Chong reported a core net loss of RM25m (normalized for RM17m forex gain, RM2m gain on disposal and RM1m write-off of fixed asset) for its 1Q20. This is compared to our net loss expectation of RM42m for FY20F and consensus’ FY20F net profit expectation of RM40m. As we expect Tan Chong to register deeper losses in 2Q20 before a recovery in 2H20, we deem the results in-line with our estimates.

Dragged by lockdown measures. Group revenue fell -32%yoy, leading Tan Chong to slip into the red in 1Q20 relative to a net profit of RM10m in the same period last year. This was mainly due to lower sales volume (-47%yoy) for autos (dragged by the MCO which commenced on 18th March) and lower revenues for the hire purchase division given a reduction in loan book size. EBITDA margin for the auto division fell to 3.9% (vs. 6.6% in 1Q19). “Others” division which comprise of the group’s investments and properties registered an EBITDA of RM16m vs. an LBITDA of RM2.6m in 1Q19, mainly due to forex gains in 1Q20.

New model boost in 2H20, but near-term drag from run-out.

The new N18 Almera (B-segment sedan), launched in Thailand in Nov19, is scheduled to be launched here in 2H20. It should be noted that the current generation Almera was launched in 2012 – we presume negotiations and kit pricing would have taken place during the 2011- 2012 period, when the Ringgit was at around USD:RM3.20 levels. Given significant depreciation of the Ringgit now (which is at ~USD:RM4.30 levels), the current generation Almera would have turned into a barely profitable model. Nonetheless, costing for the new Almera is likely to have been negotiated closer to current forex levels, which should improve margins generated from the model; this is reflected in the sharp earnings improvement in FY21F. Near-term however, run-out of the current generation Almera might drag earnings in the next 1-2 quarters.

Recommendation. Maintain NEUTRAL on Tan Chong at unchanged TP of RM1.15 – our valuation continues to peg Tan Chong at 10x FY21F earnings

Source: MIDF Research - 22 Jun 2020