This article first appeared in The Edge Financial Daily on March 2, 2018

KUALA LUMPUR: Despite the market’s ongoing concern about weaker consumer sentiment and tightening credit from financial institutions, the automotive sector is on the path to gradual — albeit moderate — recovery this year, analysts said, pointing to the strengthening ringgit against the US dollar and new model launches.

Hong Leong Investment Bank (HLIB) Research analyst Daniel Wong said auto players are definitely looking to a better 2018 due to the ringgit appreciation and improving consumer sentiment, which helps boost overall demand.

“The local auto sector is still growing, but the growth has been gradual,” he told The Edge Financial Daily yesterday.

“Among the auto stocks, those who are original equipment manufacturers (OEMs) that introduce new models would probably see their sales growing as they continue to make aggressive effort in their promotions and discount,” he said.

Wong is maintaining a “neutral” rating on the sector, and is expecting to see total industry volume (TIV) for 2018 rebounding, with improvement in consumer sentiment and normalising impact from tightened bank guidelines. He is also keeping his 2018 TIV assumption at 588,100 units.

“While the stronger ringgit will improve industry margins, higher basic material costs may [partially] offset  the benefits of the ringgit appreciation.,” he said.

In a report on Feb 26. Wong’s top picks are Pecca Group Bhd and DRB-Hicom Bhd.

Malaysia’s vehicle sales declined by 0.2% to 44,575 units in January from 44,667 a year ago.

The Malaysian Automotive Association (MAA) was reported as saying that on a month-to-month basis, the sales volume was 19% lower than that of December 2017 due to lesser sales promotions and offers by car companies.

MAA has set a TIV target of 590,000 units for 2018, which is 2.3% higher than the 576,635 units recorded last year.

TA Securities analyst Abel Goon believes that the worst is over for the auto sector.

He is upbeat on sales growth for 2018, expecting a “slight recovery” in TIV on the back of the strengthening ringgit “that will improve car makers’ margin and earnings”.

“However, the sector’s recovery will not be fantastic. It will be marginally better than last year,” said Goon.

TA Securities, which has an “underweight” stance on the sector, has Pecca and Bermaz Auto Bhd (BAuto) as its top picks.

HLIB Research’s Wong said he likes Pecca for its stable auto business prospects as auto players increase production volume and increase leather programmes, as well as its new penetration into the aviation business.

“Pecca is expected to generate strong operating cash flow of RM20 million to RM24 million per year from FY18 to FY20 on top of its current net cash position of RM92.7 million, which translates into 49 sen per share,” he added, pointing to potentially higher dividend payout.

For the cumulative six-month period ended Dec 31, 2017 (1HFY18), Pecca’s net profit fell 41.2% to RM5.66 million from RM9.62 million a year ago, while revenue came in 16.3% lower at RM54.49 million from RM65.12 million in 1HFY17.

Wong also likes DRB-Hicom for its earnings turnaround, and is of the view that the worst is over for the group. However, Wong noted that its recovery will be more on a long-term basis.

DRB-Hicom posted a net profit of RM508.71 million for the first nine months ended Dec 31, 2017 (9MFY18), following the completion of Proton’s strategic foreign partnership exercise. This compared to a net loss of RM127.07 million in 9MFY17. Revenue expanded 13% to RM9.73 billion in 9MFY18 from RM8.58 billion in 9MFY17.

“With the emergence of Chinese carmaker Zhejiang Geely Holding Group Co as a strategic foreign shareholder for Proton, we can expect

rerating catalyst for DRB-Hicom’s valuation,” he said in a report yesterday.

Meanwhile, Goon likes BAuto underpinned by Mazda CX-5 launch in the third quarter of its financial year ending April 30, 2018 (3QFY18), which has received many positive reviews.

“Going forward, we expect BAuto to continue paying out generous dividends driven by subdued capital expenditure requirements, large cash pile of circa RM100 million and special dividend arising from the listing of its Philippine division,” he said in a report on Dec 11, 2017.

For the cumulative six months ended Oct 31, 2017 (1HFY18), BAuto saw net profit drop 40.9% to RM42.41 million from RM71.74 million a year ago, while revenue fell 10.7% to RM862.94 million from RM966.79 million in 1HFY17.