Results: Tan Chong Motor (TCM MK; HOLD; TP: MYR3.45) - Pleasant surprises, but …

Good morning, we have a results note on Tan Chong Motor.

Tan Chong Motor (TCM MK; HOLD; TP: MYR3.45): Pleasant surprises, but …

• Better results (above our expectation but below street’s). Stronger sequential 1Q15 core net profit of MYR26m (+12x QoQ, -37% YoY) met 35%/19% of our/consensus full-year forecasts. The better QoQ profit was underpinned by (i) stronger revenue, on better sales mix and (ii) lower A&P expenses, which led to recovery in group EBITDA margin (+1.4ppts to 5.5%).

Expect consensus’ FY15 net profit forecasts to converge from a wide range of MYR30m-MYR233m, extracted from Bloomberg.

• Limited downside but does not warrant an upgrade just yet.  We raise our FY15/16/17 net profit forecasts by 18% p.a. as we raise group EBITDA margin expectation by 0.3ppts to 5.2%-5.8%, having considered higher ASPs (+2%) and lower A&P expenses.

While management has indicated its plans to restructure TCM’s operations into a leaner business model (i.e. cost rationalisation, owning less dealerships and focus on profitable models), we continue to see risks in TCM’s (i) huge inventory (MYR1.7b as at end-Mar) and (ii) lack of attractive model launches in the pipeline. On the upper hand, TCM should see less negative forex exposure with an already big inventory in hand (~4 months of sales).

• HOLD your horses. We believe that downside to share price is limited following a 46% fall in the last 12 months. While valuation appears attractive at 0.7x book, we see no strong re-rating catalyst to earnings in the near-term. Maintain HOLD, TP marginally raised by 1% to MYR3.45 (+1%) on unchanged 0.8x FY15 NTA peg.

P/s: 1 down, 5 more to go!