KUALA LUMPUR: The prognosis isn’t looking good for Tan Chong Motor Holdings Bhd, the exclusive distributor of Nissan vehicles in Malaysia, with analysts predicting new car sales will continue to sputter during the remainder of the year and drag down the group’s profit.

Tan Chong’s weak first quarter earnings were a testament to the challenging operating environment, and perhaps even a leading indicator of weak financial performance in the coming quarters.

Responding to queries from The Edge Financial Daily, Tan Chong acknowledged that 2015 will be a challenging year for all car players in the sector, no thanks to the depreciating ringgit and subdued consumer sentiments after the implementation of the goods and services tax (GST) on April 1, as well as economic uncertainties.

Nevertheless, the group says it will brace itself for the headwinds by focusing on cost and expense optimisation that includes marketing expenses.

“Expenditures will be prioritised to take on these challenges faced by the group. The group will take diligent steps to monitor the foreign currency risk and maintain the business competitiveness throughout the year to ensure its sustainability,” it says.

At the same time, Tan Chong says it will continue to ride on its successful models launched early this year, namely the Nissan Almera facelift, “the very successful” X-Trail series. and other key models such as the Teana, Serena Hybrid and Navara.

It adds that year-to-date sales were 8.2% higher than a year earlier, marking a positive reception of its products in a highly competitive market.

However, analysts are mostly lukewarm on the group, as they see an unexciting near-term earnings outlook with no clear catalyst to drive its share price higher. They also see the GST  implementation hampering demand for new vehicles in the next six to nine months before consumer spending normalises.

Tan Chong (fundamental: 0.55; valuation: 1.4) saw its share price dip to a five-year low of RM2.72 last Friday, bringing a market capitalisation of RM1.78 billion. This compared with its peak of RM6.98 on Aug 30, 2013. The stock has lost 17% or RM366 million of its value since Jan 2 this year when it closed at RM3.28.

Still, an analyst who declined to be named says it will depend on how Tan Chong performs in the next two to three quarters before investors get into reasons to sell their shares in the group to cut losses.

“Things don’t look good. There are no clear catalysts (to push the group’s share price higher),” he said. “But with its share price having gone down so much, we think the negatives have been priced in already,” the analyst added.

“We think that existing shareholders should hold on to the stock. But for investors who want to get in, we think they should wait for better timing,” HLIB Research analyst Daniel Wong told The Edge Financial Daily.

Wong foresees that Tan Chong’s earnings may disappoint in the subsequent quarters due to the implementation of the GST and higher import costs as a result of the stronger greenback.

The ringgit has dropped against the US dollar to close at 3.739 last Friday from the 3.20 level in the middle of last year.

Another analyst says it remains to be seen whether Tan Chong can beat consensus forecasts, which many analysts have lowered following the group’s disappointing first quarter net profit.

The analyst is of the view that Tan Chong’s car sales volume was “not great” despite a higher figure, adding that the group is facing stiff competition from other car brands.

RHB Research Institute in a May report had slashed its 2015, 2016 and 2017 net profit estimates for Tan Chong by 25.8%, 14.3% and 9.4% respectively. It cites risks for the group that include unfavourable foreign exchange (forex) movements, slower-than-expected economic growth, weaker consumer sentiment, higher interest rates and a tightening of financing. JF Apex Securities also trimmed its net earnings forecast for 2015 and 2016 by 8.5% and 12% to RM130.02 million and RM160.04 million respectively.

The research house lowered its car sales forecasts for Tan Chong to 47,206 units in 2015 from 51,132 units previously and 49,567 units in 2016 from 55,734 units previously.

RHB Research Institute is maintaining a “neutral” rating on Tan Chong with a lower target price (TP) of RM2.80 from RM3.05 previously, while JF Apex kept a “hold” rating with a lower TP of RM2.99 from RM3.27 previously.

Last month, Tan Chong announced that its net profit had contracted 36.5% to RM26.35 million in the first quarter ended March of financial year 2015 (1QFY15), from RM41.47 million a year ago.

This came on poorer contribution from its car division, which recorded lower earnings before interest, taxes, depreciation and amortisation of RM73.3 million due to higher costs of completely knocked down kits.

Tan Chong blames the higher cost on an unfavourable forex rate compared with the same quarter last year, despite revenue rising 24.5% to RM1.57 billion in 1QFY15 from RM1.26 billion a year earlier.

Meanwhile, Tan Chong remains unfazed about the deep discount in its valuation. “We believe with our solid track record, our shareholders and other stakeholders will have confidence in the management in facing the challenges and weathering the storm,” it says.

The Edge Research’s fundamental score reflects a company’s profitability and balance sheet strength, calculated based on historical numbers. The valuation score determines if a stock is attractively valued or not, also based on historical numbers. A score of 3 suggests strong fundamentals and attractive valuations. Go to www.theedgemarkets.com for more details on a company’s financial dashboard.

This article first appeared in The Edge Financial Daily, on June 22, 2015.