Auto sector expected to be underpinned by local companies

TheEdge Mon, Mar 23, 2020 09:33am - 4 years View Original


Automotive sector 
Maintain neutral:
We strongly believe that Proton Holdings Bhd and Perusahaan Otomobil Kedua Sdn Bhd (Perodua) will continue to underpin the auto sector in 2020 as their products are more attractive in pricing and provide better value for money, while we retain our bearish stance on foreign and premium car brands.

We maintain our “buy” recommendation on MBM Resources Bhd as the company has strong fundamentals and is sitting on a net cash of RM227.8 million. With that, we think that the group will be able to weather these difficult times and deal with uncertainties better than its peers in our stock universe. Furthermore, stable dividends from the group should mitigate the downside risk to its share price.

We also like Sime Darby Bhd as the group’s diversified distribution and services businesses across the Asia-Pacific region in both the automotive and industrial sectors (that is to say BMW and Caterpillar) serve as a strong backbone to the group’s earnings. It can also act as a direct proxy for an improvement in the FBM KLCI should the selldown in the domestic equity market tapers off. In the wake of the movement control order, we foresee consumers prioritising spending. Consumers will put off purchasing big-ticket items such as cars and instead focus on utilising discretionary spending to purchase day-to-day essentials in the near to medium term or at least until the Covid-19 pandemic tapers off.

We are concerned about Tan Chong Motor Holdings Bhd’s outlook for the near to medium term as the group is known to have a persisting inventory problem, standing at more than RM1.5 billion. We believe that this is due to the group’s inability to sell its vehicles due to uncompetitive pricing and unattractive product line-ups compared with those of its competitors.

The recent weakening of the ringgit is also a concern. Should the ringgit continue to weaken, it will ultimately be negative for the sector and automotive players under our coverage.

Key companies that would suffer from a weaker ringgit are Tan Chong, UMW Holdings Bhd and Pecca Group Bhd as a substantial amount of their cost of goods sold is denominated in US dollars at 60%, 40% and 40% respectively. Ceteris paribus, this would lead to heightened costs, consequently squeezing their net earnings.

Despite potential further overnight policy rate cuts, we think that the minimal interest cost-savings are unlikely to spur sudden consumer interest and lift consumer confidence to purchase big-ticket items such as vehicles, or be a catalyst for growth for the auto sector. 

With that, we cut our earnings projections and valuations for all auto companies under our coverage. — AmInvestment Bank, March 20

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