Automotive players’ margin to be further squeezed — analysts

fd_27jan2015_theedgemarkets

-A +A

KUALA LUMPUR: Automotive players are likely to suffer a further squeeze on their already tight margins this year as the upcoming goods and services tax (GST) and weaker ringgit are likely to add to cost pressure, said analysts.

This is because it is unlikely that automotive players could raise prices and pass on additional costs to car buyers, with the heightened competition in the market and the tightening of loan criteria by banks.

As it is, automotive players have already been forced to throw out promotions and discounts in what is seen to be a prelude to a possible price war.  

TA Securities research analyst Angeline Chin told The Edge Financial Daily that automotive players, especially in the most affordable A segment (mini cars) and B segment (sub-compact cars), would risk further margin erosion to keep their market share.

“Competition is already heating up. To vigorously defend market share, we expect more discounts and promotions to be given to lure buyers,” she said in an email.

MIDF Research analyst Annuar Rahman told The Edge Financial Daily that competition could pick up this year, especially post-GST.

“While most car manufacturers indicated that there would be some downward adjustment in prices, the softer demand as a result of the GST imposition could see competition increasing,” he said.

“Players such as UMW Holdings Bhd (fundamental: 2.2; valuation: 1.2) and Tan Chong Motor Holdings Bhd (fundamental: 0.8; valuation: 1.8) could also see their margins coming under pressure as a result of the higher US dollar apart from competition,” he said.

UMW carries the Toyota brand, while Tan Chong is the distributor of Nissan vehicles.

Chin agreed that UMW would be hit by the stronger greenback as the bulk of its purchases are in US dollar.

“The weakening ringgit is worrying and it may drive up the price of imported spare parts,” she wrote in her report dated Jan 22.

Meanwhile, Annuar said he would not rule out a further tightening of lending requirements by Bank Negara Malaysia to contain the level of household indebtedness.

Given the industry headwinds, most analysts have kept a “neutral” rating for the automotive sector this year, citing a lack of exciting near-term catalysts.

The effects of these headwinds were already felt as early as the last quarter of 2014, when automotive players reported lower operating profit in their latest quarterly financial results compared with the same quarter in the previous year.

“We maintain our neutral stance on the sector as we believe that the sector is fairly valued and has limited rerating catalysts,” said Affin Hwang Investment Bank Bhd research analyst Ong Boon Leong in a report dated Jan 22.

Ong’s sentiment was also shared by Annuar in his sector update report, saying “we believe earnings risks are largely priced in”.

Despite the challenging operating environment, analysts still see some worthy pickings, like MBM Resource Bhd (fundamental: 1.4; valuation: 1.2) and Berjaya Auto Bhd (fundamental: 2.35; valuation: 0.9) that may perform reasonably well, if not better than expectations.

MIDF’s Annuar sees potential positive in the turnaround of MBM Resources’s alloy-rim business, Oriental Metal Industries (M) Sdn Bhd, which should see higher utilisation rate.

He also noted that MBM Resources may see stronger contributions from its associate companies, Perusahaan Otomobil Kedua Sdn Bhd (Perodua) and Hino Motors Manufacturing (M) Sdn Bhd, despite weaker earnings recorded last year due to start-up costs from new manufacturing facilities.

“Perodua is expected to see strong sales from the new Perodua Axia and the recently-launched Perodua Myvi facelift,” said Annuar, who recommended a “buy” on MBM Resources with a target price of RM4.80.

MBM Resources is also Maybank Investment Bank Research analyst Ivan Yap’s “top pick”, given its more attractive valuations and exposure to the small-car segment via Perodua. Hence, Yap too has a “buy” call on the stock, but with a lower TP of RM3.50.

Meanwhile, Berjaya Auto, which markets the Mazda brand, is CIMB Investment Bank Research analyst Azman Hussin’s top pick for the sector.

The firm, which he has an “add” call on, is expected to launch a slew of new models that will help sustain its strong growth trajectory this year, he said.

Kenanga Research analyst Desmond Chong also thinks Berjaya Auto is the “apparent winner” in the automotive sector, due to the weakening yen against the ringgit as approximately 50% of its total costs is exposed to the yen.

Hence, Chong has an “outperform” call on the stock with a TP of RM4.29.

“We expect the yen to stay soft,” he said in a recent report, adding that every 1% fluctuation in the yen would raise the group’’s net profit by 5% in FY15 and FY16.

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 January 27, 2015.