Weak consumer sentiments dull automotive’s prospects

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PETALING JAYA: Industry observers, who largely believe that the Malaysian Automotive Association’s (MAA) 2014 total industry volume (TIV) target of 680,000 units would not be met, are cautious about the automotive sector’s prospects this year.

Though many are of the view that TIV will not contract in 2015, they think its growth is likely to be marginal to flat, primarily because of lower disposable incomes due to rising costs of living and the impact of the goods and services tax (GST) at 6% effective on April 1.

MIDF Research analyst Ahmad Annuar Abdul Rahman expects TIV in 2015 to grow by 0.3% to 670,000 units from its 2014 target of 668,000, which is below MAA’s 2014 target of 680,000 units.

He said the GST is expected to dampen consumers’ appetite for big-ticket items, though this could be mitigated by a further decline in fuel pump price.

“Given the current price of crude oil, fuel pump price could ease further. But the decline may not be as drastic due to the weakening ringgit,” he said when contacted in December last year.

MIDF Research’s top pick for the sector is MBM Resources Bhd (MBM), as its share price has not reflected any potential benefit that the stock is expected to gain from stronger Perodua contribution in 2015, which is premised on the weakening yen and Perodua Axia’s strong sales.

“Furthermore, we expect MBM’s manufacturing business, specifically the alloy-wheel plant, to see narrowing losses as production volume ramps up,” he added.

Meanwhile, Kenanga Research analyst Desmond Chong said TIV is not expected to go south in 2015 as the research house believes that Malaysia’s economy will still be resilient, based on its in-house 2015 real gross domestic product growth forecast of 5.1%. 

“We forecast a flat TIV growth of 670,000 units in 2015 with expectation of consumer’s lower disposal income under the new tax structure and rising cost of living,” he added.

He said the firm’s top pick for the sector is Berjaya Auto Bhd for investment merits, backed by its “superior” growth prospects on the back of a strong pipeline of exciting models. 

He also said the company’s expansion on margins on the back of favourable exchange rate due to huge exposure to yen as well as lower import duties are positive factors.

Chong said the company’s potential dividend payout of 40% could translate into about 3.5% dividend yield.

On the flipside, Chong said Tan Chong Motor Holdings Bhd may not fare very well this year.

He attributed this to ongoing stiff competition, particularly in the B-segment or supermini segment, which triggers more aggressive discounts and higher marketing costs.

He said this, coupled with the weakening ringgit against the dollar, corrodes the profitability of players with huge exposure to imported completely knocked down vehicles.

Hence, earnings growth for automotive companies, especially Tan Chong Motors, could be kept in check in 2015, he noted.

Meanwhile, MAA president Datuk Aishah Ahmad, when contacted, admitted that it is likely that its TIV target for 2014 will not be met.

“I think we can achieve a 1% growth, about 661,000 units. People are holding back on big-ticket item purchases. Also, the increasing cost of living does not help,” she said.

MAA revised its 2014 TIV forecast to 680,000 units from 670,000 units on July 22 last year based on a more promising economic outlook, better consumer sentiment, and strong TIV recorded in the first six months of the year.

MAA’s TIV target for this year is 693,500, a 2% growth from 2014’s 680,000. When asked, Aishah, however, declined to reveal if the target has been revised as the association is scheduled to announce its outlook for 2015 — together with the country’s automotive performance in 2014 — on Jan 21.

MIDF Research’s Ahmad Annuar said for MAA’s 2014 TIV to be met, it would require a sharp ascent in November and December. 

“In order for the target to be met, monthly sales for November and December need to average at over 66,000 units a month or grow by a staggering 18% over the last two months. We believe it is likely to be missed,” he added. 

 

This article first appeared in The Edge Financial Daily, on January 8, 2015.