News flash: Tan Chong Motor (TCM MK; HOLD; TP: MYR2.65) - Dropped out of Shariah list

Tan Chong Motor (TCM MK; HOLD; TP: MYR2.65): Dropped out of Shariah list

• Pass the financial ratio benchmark but failed the business activity benchmark. TCM’s drop out of the Shariah list could possibly be attributed to a breach in the 5% business activity benchmark for its Financial Service division (i.e. hire purchase loans offering) which accounts for 1% of group revenue but 5% of EBITDA based on breakdown provided in its 2014 annual report. In order to comply, TCM’s Financial Service division must not cross 5% of group revenue as well as pre-tax profits. We suspect that pre-tax profit from this division has crossed the 5% threshold.
• Negative on this development. TCM’s top 10 shareholders includes significant holdings by EPF (8.96%) and PNB (4.98%) as at 31 Mar 2015 which engages in Shariah-investing. As such, we do not discount a possibility of a sell down on TCM in the next 6 month as Shariah funds realign their portfolios.
• Maintain HOLD; tough times ahead. Poor consumer sentiment implies a challenging outlook for the auto sector, posing downside risk to our volume and margin estimates.