Period

3Q16/9M16

Actual vs. Expectations

9M16 slumped into the red with a loss of RM201m compared to our and consensus fullyear net profit forecasts of RM117m and RM110m, respectively.

The negative variance from our forecast is mainly due to higher-than-expected losses from the automotive segment.

Dividends

No interim dividend was declared. Key Result

Highlights

QoQ, 3Q16 revenue rose 2.5% to RM3.3b due largely to higher contribution from automotive (+14% QoQ). However, auto sales volume continued to slide, led by Proton (-18.4% QoQ) and Suzuki (-30.7%) while Mitsubishi (+17.8%) and Isuzu (+22.6%) shows improvement. Pretax loss at the automotive division dragged down 3Q16 LATAMI to RM185m.

YoY, 9M16 revenue declined 9% due mainly to lower contribution from automotive (-9.3%). Proton continued to disappoint with negative sales growth of 10% bringing total sale units to 74k in 9M16. Due to the losses at its automotive division which Proton accounts for 70-80%, 9M16 registered a loss of RM201m compared to a core net profit of RM113m in 9M15.

Outlook

Earnings contributions are expected to come gradually from the RM7.55b AV8X8 contract while the property division is expected to contribute positively from several launchings. However, Proton is seen to continue losing market share resulting in the automotive division dragging down earnings.

Change to Forecasts

We cut our FY16E and FY17E earnings by 24% and 62%, respectively, due to the poor set of results.

Rating & Valuation

Due to the erratic quarterly earnings, we are applying a 35% discount to its SoP valuation. Correspondingly, we downgrade our SoPderived target price from RM1.06 to RM0.80. Maintain Underperform.

Risks to Our Call

Upside risk: A swift turnaround in the automotive division.

Source: Kenanga Research - 26 Feb 2016