Results: Tan Chong Motor (TCM MK; HOLD; TP: MYR3.45), Wah Seong (WSC MK; SELL; TP: MYR0.90), Update: KNM Group (KNM MK; BUY; TP: MYR1.00)

Tan Chong Motor (TCM MK; HOLD; TP: MYR2.55): Hit by unfavourable USD exposure

• Below expectations. Sequentially weaker 2Q15 net profit of MYR14m (-46% QoQ, +16% YoY) due to weaker car sales and higher COGS from weaker MYR took 1H15 earnings to MYR41m (-25% YoY), accounting for 46%/30% of our/consensus full-year forecasts. A smaller 2sen (3sen previously) interim DPS was declared; to go ex on 15 Sep 2015.
• Cut our FY15/16/17 earnings forecasts by 42%/37%/37% to account for (i) weaker vehicle sales amid poor consumer sentiment and (ii) auto EBITDA margin contraction to 4.5% on higher COGS from the weaker MYR (USD1/MYR3.85 from USD1/MYR3.60).
• Tough times ahead. 2H15 will be even more challenging for TCM as escalating USD-denominated costs (average since Jul 2015: USD1/MYR3.91) are expected to land a harder punch on TCM’s auto earnings. Stay sideline; TP lowered to MYR2.55 (-26%) on lower 0.6x FY15 NTA peg.

Wah Seong (WSC MK; SELL; TP: MYR0.90): Sub-par 2Q15; D/G to SELL

·         Below expectations. Excluding the MYR3m exceptional loss, core net profit of MYR15m (-46% QoQ; -68% YoY), took 1H15 core earnings to MYR42m (-37% YoY), or 42% of our full year forecasts. Segmental-wise, all divisions, except renewable energy, reported weaker QoQ performance. WSC has declared a first interim single tier DPS of 2.0 sen in 2Q15 (2Q14 DPS: 2.5 sen), which will go ex on 11 Sep 2015.

• Challenging environment.  We expect a tough 24 months ahead in terms of earnings, taking cue from its 2Q15 performance. Our cut in 2015/16/17 core earnings by 22%/29%/31% mainly reflects the slowdown on overall work. WSC’s depleting orderbook of MYR1.1b (-9% QoQ) offers around 12 months operating visibility.
• Cut to SELL. Valuations are demanding post earnings revisions. TP lowered to MYR0.90 (-28%) TP based on unchanged 10x 2016 PER.

KNM Group (KNM MK; BUY; TP: MYR1.00): Nets Cypark’s RE EPCC works

·         A bigger play on renewable energy. KNM, together with its consortium partner, Hitachi Zosen (HZ), has bagged a MYR268m EPCC renewable energy (RE) job from Cypark (CYP MK; No-rated) for the solid waste modular advance recovery and treatment system waste management solutions at Ladang Tanah Merah, Negeri Sembilan. KNM will undertake the onshore portion valued at MYR133m while HZ will handle the offshore works (MYR135m).

• Positive but no change in our forecast as we have incorporated RE job wins of MYR350m for FY15. KNM is expected to register a 20% gross margin from this EPCC RE job, decent in our view. We estimate net profit contribution of MYR10-15m p.a. over FY15-17. We understand that KNM targets to secure about MYR300m-MYR500m worth of RE works for 2015, which will come from domestic and overseas.
• Undemanding valuations (6x FY16 PER); Reiterate BUY. While it is gradually remodelling its business into a RE play for a more sustained earnings and cashflows, its Peterborough RE venture may see some delays following the weakening of MYR, which would raise costs. Overall, its reducing debt level, improving cashflows and cost management are tangible testament to management’s commitment to a more disciplined business approach post GFC.