<News Alert> Profit warning; margin compression larger than expected
- Nexteer announced its 1H22 core net earnings expected to decline by about 54% y-o-y to US$38m, based on preliminary estimates
- Geopolitical tension, supply chain disruption and pandemic lockdowns were the key reasons for the weaker than expected 1H22 performance
- Anticipate sequential improvement in 2H as some of the negatives are easing, e.g. resumption of operation in China
- Our earnings estimates are under review; currently we have BUY rating with TP of HK$7.30
What’s new
Nexteer expect its 1H22 core net earnings to decline by about 54% y-o-y to US$38m. The disruptions due to geopolitical factor and pandemic lockdowns had dragged on OEMs production schedule, thus leading to lower shipments for Nexteer. Global vehicle sales have fallen since Mar-22 and for 1H22, total volume was down c.8.5% y-o-y.
The commodity inflation is hurting product margins as well. EBITDA margin was 9.1% in 2H21 (vs pandemic period of 9.6% in 1H20) and we believe the margin pressure extended into 1H22 due to sharp increase in raw material costs. However, raw material prices have eased recently, which we believe was due to rising interest rates and slowing demand. This should reduce the margin pressure in 2H.
The 2H business outlook is expected to improve with the recovery of the Chinese auto market. Also, as OEMs ramp up productions, volume shipment should be lifted.
We are reviewing our earnings assumptions post the profit warning. Currently we have BUY rating with TP of HK$7.30.