Lead Story: Still some power left in motor stocks

This article first appeared in Capital, The Edge Malaysia Weekly, on November 11, 2019 - November 17, 2019.

NAP 2019 is likely to focus on technological applications and development. Photo by Suhaimi Yusuf/The Edge

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AUTOMOTIVE and auto part companies have been among the more robust performers on Bursa Malaysia this year, soft economic conditions notwithstanding.

Sales of national marques have been solid, outperforming the non-national segment.

As at Nov 7,  MBM Resources Bhd, PECCA Group Bhd and DRB-Hicom Bhd were leading  the pack with hefty share price increases of 94.9%, 76.7% and 44.2% respectively since the beginning of the year. Bermaz Auto Bhd (BAuto) rose a moderate 10%.

Given the strong acceleration, is there any power left in automotive stocks ahead of the release of the long-awaited National Automotive Policy (NAP) 2019?

Bear in mind that despite the uplift in prices, automotive stocks are still trading at relatively low price-earnings ratios (PERs).

On a trailing four-quarter basis, MBM Resources was trading at a PER of 7.2 times as at last Wednesday and Tan Chong Motor Holdings Bhd at 7.5 times. BAuto and APM Automotive Holdings Bhd were trading at higher PERs of 9.7 times and 10.3 times respectively.

Among the conglomerates with an auto segment, DRB-Hicom was trading at the highest valuation of 19.77 times PER, followed by UMW Holdings Bhd at 16.8 times and Sime Darby Bhd at 16.3 times.

Although there appears to be a divergence in valuations between the two groups of automotive stocks, an analyst believes the industry as a whole lacks new catalysts to excite investors with the good news largely already priced in.

“We are also not sure when the NAP 2019 will be revealed, so investors cannot wait for something that is so uncertain,” says the analyst.

With its launch already postponed a number of times, NAP 2019 was submitted to the Cabinet last Friday, but it is not known when the policy paper will be approved. In any event, the interminable delays have prompted several car manufacturers to put off investment decisions on new models. The slow process of getting approval for new car prices has also had a knock-on effect on the launch of new or facelifted models.

These delays did nothing to invigorate the market, especially in the third quarter when automotive sales started to weaken. Car sales in the first half were 2.3% higher than in the same period last year, but were 2.63% lower year on year as at end-September.

“NAP 2019 will give better direction to local distributors and assemblers on what kind of models should be brought in, especially now that the government is talking about next-generation vehicles,” says an industry official.

The uncertainties aside, the analyst that The Edge spoke to believes that MBM Resources still has legs, despite robust gains that propelled its shares to RM4.09 last Thursday. Given analysts’ average 12-month target of RM4.87, the stock has a potential upside of 19.1%.

In a Nov 7 report, Brian Yeoh, an analyst with Affin Hwang Capital, says MBM Resources is the firm’s preferred stock for exposure to the automotive industry because of its appealing valuations of only nine times FY2019 core earnings.

In an Aug 21 report, Affin Hwang Capital had raised its estimate for MBM Resources’ earnings per share (EPS) for FY2019 to FY2021 by 9% to 18%, to reflect higher contribution from its auto part manufacturing division and associates, as well as lower interest costs.

“In tandem with our earnings upgrade, we raise our target price to RM4.55 (from RM4.08) based on unchanged 10 times PER and reaffirm our ‘buy’ rating on MBM Resources. At eight times 2020E PER and 8% yield, valuations look attractive,” says Yeoh in the report.

MIDF Research analyst Hefriz Hezry has a similar target price, saying in an Aug 26 report that the automotive company remains a cheap proxy for the volume expansion and spillover in parts manufacturing currently enjoyed by Perusahaan Otomobil Kedua Sdn Bhd (Perodua).

MBM Resources holds a 20% stake in Perodua. In the six-month period ended June 30, associates contributed almost 65% to MBM Resources’ profit before tax of RM145.8 million.

Hefriz says catalysts for the stock’s performance include strong Perodua total industry volume expansion this year on the back of the Aruz to fill a vacuum in the company’s model mix, as well as the sale of OMI Alloy (M) Sdn Bhd, a subsidiary that produces alloy wheels.

MBM Resources is in the process of selling loss-making OMI Alloy, which ceased operation as at end-June as it had fulfilled its contractual obligations to Perodua. The cessation of business removes about RM20 million of expected annual losses for MBM Resources.

“The sale is likely to result in a gain as OMI Alloy’s assets have been almost fully written down — the bulk of the write-down was recognised in FY2017. It is worth noting that the land the plant sits on has never been revalued,” says Hefriz.

Analysts are also still sanguine about BAuto’s prospects as the company is trading at a relatively low valuation. BAuto’s share price had fallen from a peak of RM2.78 on July 9 to RM2.21 last Thursday.

The lacklustre performance of its share price could be because of a delay in pricing approvals for the Mazda CX5 Turbo and CX8, though the issue is expected to be resolved soon.

In his Nov 7 report, Yeoh says that during his team’s visit to Inokom Corp Sdn Bhd’s plant in Kulim, Kedah, they noticed a substantial number of Mazda cars standing idle in the plant’s compound as BAuto has not been able to sell the two models due to pricing approval delays by the authorities.

Inokom is 56%-owned by Sime Darby Bhd while BAuto holds a 29% stake in it. The remaining stake is held by Hyundai Motor Co. The plant assembles 12 models from four brands, including the Hyundai Santa Fe, and eight BMW models as well as MINI models, apart from the two Mazda models.

Affin Hwang Capital has lowered its target price for BAuto to RM2.30 from RM2.60, cutting its estimated FY2020 to FY2022 EPS by 8% to 12%, reflecting lower sales forecasts and earnings before interest, taxes, depreciation and amortisation (Ebitda) margin assumptions.

However, Wan Mustaqim Wan Ab Aziz, an analyst who covers BAuto at Kenanga Research, has a more optimistic outlook for the group and has an “outperform” call and a target price of RM2.75, based on 13 times 2020 estimated EPS.

In an Oct 8 report, produced after a meeting with BAuto CEO Datuk Francis Lee, Wan Mustaqim says the optimistic outlook is based on the expected earnings recovery from the stream of all-new models, superior margins vis-à-vis its peers and steady dividend yield.

Conglomerates Sime Darby, DRB-Hicom and UMW are valued at a premium compared with the pure automotive companies because their other business segments support their outlook.

As at last Thursday, Sime Darby’s share price was trading 2.4% higher than at the start of the year while UMW was down 17.2%. Owing to its exposure to Proton Holdings Bhd, DRB-Hicom is the only conglomerate that has rallied so far this year.

In the case of Sime Darby, the industrial division is expected to continue to grow, especially in the Australasia region, while the group is still looking to expand its healthcare division after losing out to Hong Leong Group in the acquisition of Columbia Asia Group.

On the group’s automotive division, AmInvestment Bank’s Jeremy Yap Jake Hui says he expects the business to remain sluggish as margins will continue to erode due to the prolonged heavy discounting on BMW vehicles to remain competitive in the region.

“We maintain our ‘hold’ recommendation on Sime Darby with an unchanged sum-of-parts-based fair value of RM2.64 per share based on a FY2021F PER of 11 times for its motor segment. The share price is seen as fairly valued at current levels with limited upside,” says Yap in an Oct 31 report.



What do we know about NAP 2019?

The National Automotive Policy (NAP) 2019 was submitted to the Cabinet last Friday, and Nov 21 is the tentative date for the launch of the policy, which replaces the current one that has been in place since 2014.

Those in charge of its formulation have hinted at what is to come but, until it is unveiled, we can only speculate about its contents.

The most important update would probably be the focus on technological applications and development in the automotive industry, which would involve adopting Level 3 autonomous vehicle technology for future car models.

Level 3 autonomous vehicles are those that have the technology to sense their surroundings and to provide alerts, warnings and feedback to drivers. They are designed to enhance human responses or act as a guide to drivers to make better driving decisions.

Technology that is already on the market that is deemed Level 3 autonomous includes Honda Sensing, which is in the Honda CRV, and Volvo City Safety, which has been built into the Volvo XC60.

This technology is one of the main features of the Next-Generation Vehicle (NxGV) that the government seeks to engineer through NAP 2019. The NxGV will essentially be an energy-efficient vehicle with a Level 3 autonomous system, which the government would like the so-called third national car company to develop and produce in the near future.

A complete definition of what the NxGV is will be revealed later, in 2022.

NAP 2019 might also provide the policy platform for the government to develop a more comprehensive framework on “Mobility-as-a-Service” (MaaS). This is about utilising vehicles to provide a service, such as in passenger mobility or food and parcel delivery, given the proliferation of ride-hailing companies such as Grab in Malaysia and Gojek in Indonesia. Thus the push for Malaysia to develop its first flying car could also fall under MaaS because it could be used for medium-haul parcel delivery or for executive transport between cities. Drones as a delivery tool could also appear under MaaS.

The policy objectives would likely be cognisant of the global and domestic economic climate, the US-China trade war and the rapid changes in technology and automation in the automotive industry.

Of course, one can also expect the policy to address entrepreneur development, especially among bumiputeras, as well as talent development.



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