TCHONG (FV RM4.00 - NEUTRAL) FY11 Results Review: Applying The Brakes

As anticipated, Tan Chong’s profits dropped sharply as 4Q earnings plunged 40% y-o-y and 43% q-o-q. Full-year earnings fell 4.4%  despite  the 10% growth in revenue  as  higher raw material costs squeezed margins, the RM weakened against USD, the supply chain disruption led to under-utilization of its plants, and its Vietnam operation was still loss–making. The company’s 2012 outlook, however, appears to be brighter, backed by an estimated 18% growth in vehicle sales, which will in turn rev up its earnings by the same quantum.  Given the limited downside to our RM4.00  FV,  we upgrade Tan Chong to NEUTRAL from SELL. Our FV is pegged at 10x FY12 EPS, in line with the sector average.

Missing estimates, no thanks to supply chain disruption. While the group’s revenue of RM3.85bn was in line, its FY11 core earnings missed our and consensus estimates (including exceptionals totaling RM4.1m) by 8% and 14% respectively. For the full year, earnings were down 4.4% despite the 10% jump in revenue as Tan Chong’s margins were squeezed by higher raw material costs, a weaker RM and the under-utilization of its plants owing to a supply chain disruption. In 4Q, the flood crisis in Thailand put a dent in earnings, which plunged 40% and 43% y-o-y and q-o-q respectively.

Vietnam  op still loss-making.  Despite reporting revenue of RM162m for FY11, Tan Chong’s Vietnam subsidiary reported an operational net loss of RM5.8m.

Dividend. The group has proposed a 6 sen per share gross dividend, unchanged from last year’s 12 sen overall for the full year. At the last closing price, this provides a gross yield of 2.8%.

2012 outlook  to brighten. With the recently launched all-new Nissan Vanette and the upcoming B segment CKD sedan (a new segment where Nissan will be competing head-on with Toyota’s Vios) slated for launch in September and a number of CBU models in the pipeline, we see a better 2HFY12. Furthermore, its Danang plant should be operational as early as March this year, with a monthly production target of 1,200 units, of which some would be exported to China. Nonetheless, the 1H outlook should remain challenging. Given the higher revenue driven by a 18% growth in vehicle volume for FY12 (Malaysia and Vietnam combined), we see Tan Chong’s earnings growing by 18.4% y-o-y.

Upgrade to  NEUTRAL. We maintain our earnings. Given the limited downside to our unchanged FV of RM4.00, we upgrade Tan Chong to NEUTRAL from SELL. Our FV is pegged at 10x FY12 EPS, in line with the sector average.

Source: OSK188