Tough times for Malaysian auto stocks

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PETALING JAYA: Local automotive stocks, which took a beating during the recently concluded financial reporting season, are in for tough times in light of the prevailing weakness in consumer sentiment and unfavourable import costs.

Of the listed auto stocks, analysts are bullish of Bermaz Auto Bhd (BAuto), given its new product range and target customers, which are less sensitive to the rising cost of living.

RHB Research auto analyst Alexander Chia, in a recent report, said the stock offers a sustainable return on equity of 29% in 2017.

“This is superior to the Malaysian automotive sector’s average of 8%.This has come down from the 39% to 73% levels posted in 2011 to 2016 on a combination of slowing but sustainable core net profit margins, moderating asset turnover multiples and lower equity multipliers.” BAuto is the official distributor of Mazda cars.

Chia added that while the company had new generations of the CX-9 and CX-5 for the Malaysian market in 2017, BAuto’s Philippines unit, Bermaz Auto Philippines (BAP) is set to release new variants of the CX-3, Mazda3 and CX-5 in the Philippines.

“BAP has a total industry volume (TIV) target of 5,000 units in 2017, which we expect to pick up to 5,500 to 6,000 units in 2018, driven by its new model launches.

“Following the completion of the Inokom paint shop upgrade, BAP is to begin importing CX-5 units from Malaysia instead of Japan in the second half of 2017, which we expect to drive up its margins upon the stripping-off of import duty from Japan.”

Kenanga Research said the stock may outperform its peers, given that its targeted customer base, which is in the middle-income to high income bracket, are less sensitive to the rising cost of living.

“We also see a high-potential value to be unlocked with the proposed listing of its Philippines subsidiary given the robust growth prospect.

“All in, we are still optimistic with its investment merits supported by better top line growth prospect from low base on the back of strong pipeline of exciting models and potential dividend pay-out of 90%, which translates into fair dividend yield of 8.5%.”

In the second quarter ended Oct 31, 2016, BAuto’s net profit dipped 42.3% to RM30.6mil from RM53.1mil in the previous corresponding quarter period, while revenue fell to RM473.2mil from RM542.4mil previously.

Nissan distributor, Tan Chong Motor Holdings Bhd, meanwhile suffered a net loss of RM4.5mil in its third quarter ended Sept 30, 2016, compared with a net profit of RM29.18mil in the previous corresponding period. Revenue was higher at RM1.40bil, compared with RM1.37bil previously.

MIDF Research said earnings were within expectations, accounting for 74% of its RM81mil core net loss for 2016. It said Tan Chong’s results have missed consensus’ estimates of a RM49mil net loss.

“Tan Chong remained in the red in the third quarter of 2016 but net loss narrowed to RM11mil from RM25mil in the past two quarters.

“Nissan TIV was down 11% quarter-on-quarter (partly due to the Raya festivities and related plant closure) but this was compensated by a better sales mix, that is average revenue per car which rose 14% quarter-on-quarter to RM149,000.”

The research house pointed out that Tan Chong’s third quarter benefitted from the weaker dollar (average rates of RM4.01).

“However, fourth quarter 2016 average rates have risen to 4.05 while spot dollar is now at its strongest in at least the past decade at RM4.47.

“Secondly, Tan Chong may face stiff competition next quarter if its peers are aggressive with year-end discounting as there were no new Nissan launches this year.”

UMW Holdings Bhd, which owns 51% in Toyota vehicle distributor UMW Toyota Motor Sdn Bhd, suffered a net loss of RM128.83mil in its third quarter ended Sept 30, 2016, compared with a net profit of RM13.52mil in the previous corresponding period.

Revenue during the quarter dipped to RM2.86bil from RM3.53bil a year earlier.

AllianceDBS Research said earnings were below expectations, largely due to the weaker auto, oil and gas and other segments.

On its auto division, the research house said it expected Toyota sales to decline this year and improve marginally in 2017 and 2018.

The aggressive marketing and promotional campaigns that the company is undertaking to help push sales, could also have an impact on margins, said Alliance DBS Research.

“Although the promotions and added features would help to support sales volumes for the rest of the year, it could also result in weaker margins for the auto division.

“Pre-tax profit margins for the division have fallen for five consecutive years. Margins have also been weighed down by higher costs (for imported materials) arising from the weaker ringgit.”

In August, the company’s automotive arm, UMW Toyota Motor, announced that it still remains on track to hit sales projection of 70,000 vehicles this year in spite of challenging market conditions.

DRB-Hicom Bhd, meanwhile, marked its fourth consecutive quarterly loss, reporting a net loss of RM267.55mil in its second quarter ended Sept 30, 2016, compared with a net profit of RM52.67mil in the previous corresponding period.

Revenue during the quarter dropped to RM2.64bil from RM3.25bil in the previous corresponding period.

According to Kenanga Research, its automotive division sustained a loss of RM207mil due to losses at Proton, volatility in foreign exchange rates and weak consumer sentiment. It said the outlook for DRB-Hicom remained challenging given the tough operating environment of lower sales of motor vehicles amid stiff competition as well as weak consumer demand.

“However, the group is looking at a turnaround plan for Proton, which involves a RM1.5bil soft loan from the Government that is geared towards helping Proton in its turnaround efforts, as well as to expand into domestic and international markets and to identify a strategic partner by the first quarter of 2017.” Despite being positive on news of a potential tie-up with a foreign partner, it expected the overall weakness in the automotive segment and the prevailing fragile consumer sentiment to dampen DRB-Hicom’s subsequent quarterly performances, as well as trading sentiment.