Tan Chong Motor making a comeback

However, Bloomberg data showed that the majority of analysts are still neutral as there are six

PETALING JAYA: Tan Chong Motor Holdings Bhd, the laggard among auto stocks, is regaining investor interest on the back of a potential turnaround in earnings.

The distributor of Nissan vehicles had slipped into the red in financial year 2016 (FY16) because of intense competition and a loss in market share from a freeze in new launches. Adding on to its woes were a weak ringgit and heavy discounting to clear off old inventories.

This has affected investor confidence, resulting in some 40% drop in the company’s share price in the last two years.

However, some analysts reckon that Tan Chong could be headed for a smoother ride in 2018.

For one, the stronger ringgit has improved its outlook, given the company’s large cost structures denominated in US dollar.

Besides this, MIDF Research noted that Tan Chong had successfully pared down its inventory in the past 12 months and is expected to resume new model launches this year.

The research firm said in a report that it has revised up its FY18 forecast to a core net profit of RM21mil from a net loss of RM81mil previously and introduced FY19 forecast earnings of RM61mil.

For the nine months ended Sept 30, Tan Chong’s net losses widened by 44% from a year ago to RM81.6mil, while revenue dropped by 21.8% to RM3.3bil during that period. Analysts expect it to record another year of loss for the whole of FY17.

Tan Chong has large exposure to US dollar imports for completely-knocked-down kits estimated to account for 18%-20% of total cost.

“We forecast losses to narrow and gradually hit breakeven in FY18, followed by more meaningful earnings thereafter on the back of a stronger ringgit now.

“Resumption of new model introductions from 2018 will drive a recovery in volumes and lower kit cost in US dollar terms, as costing will be benchmarked against current foreign exchange (forex) levels relative to the US$1:RM3.10 level when the Almera was introduced back in 2012.”

And with the Almera model having been in the market for more than five years, the bulk of capital expenditure (capex) would have been fully depreciated now, the research firm said.

According to MIDF Research, the company’s move to pare down its expensive inventories in the past two years will see it gradually increasing exposure to the current, much lower forex levels (of about US$1:RM4), which is about 5% appreciation from the US$1:RM4.20 level.

“Inventory levels (comprising mainly the Almera, X-Trail and Navara) have reduced by 30% as of the third quarter of 2017 (RM1.3bil) against the peak of about RM2bil in the first quarter of 2016.

“Management targets to reduce this to below RM1bil in the fourth quarter of 2017.”

Following lower inventories, the company’s debt levels and finance cost is expected to reduce in tandem.

“We forecast net gearing to drop to about 40% in FY18 from as high as 55% in FY16 which captured peak inventory levels.

“Interest cover is expected to improve to five to six times over FY18/19 from just 1.5 times forecast in FY17.”

As for resuming new launches, MIDF Research said its meeting with management suggested that the company’s 2018 launch would involve an entirely new model not currently in its Nissan line-up, with management indicating the market’s fast-changing preference towards sport-utility vehicles (SUVs).

Currently, there is a large vacuum in its model line up with regards to the compact SUV segment where the Honda HRV and Mazda CX3 have been thriving.

Based on market talk, the models that may be introduced include the Nissan Kicks, which is a compact SUV priced under US$19,000 (RM76,000) in the United States, a new Serena Hybrid and the new Leaf.

But while this would drive earnings’ improvement, MIDF Research said it may not return Tan Chong to the 2014-2017 market share of 7%-8%. Its market share stood at 4.8% in FY17.

MIDF Research said it is upgrading the stock to a “contrarian buy from a hold” and raised its target price to RM2.05 from RM1.85 previously.

This still conservatively pegged Tan Chong to trough price-to-book value of 0.5 times.

However, Bloomberg data showed that the majority of analysts are still neutral as there are six “hold” calls on the stock versus two “buys” and one “sell” rating.

Meanwhile, Hong Leong Investment Bank Research said the company’s weak sales remained a concern due to low operational scale although the ringgit stabilisation would improve its prospects.

The research firm is also mildly positive on Tan Chong’s recent exclusive distributorship agreement with Xiamen King Long Automotive Industry Co Ltd to distribute, assemble and provide after sales service for King Long coach model in Vietnam.

“It will be able to improve the utilisation rate of its Danang plant with the new assembling line for King Long.

“But the plant is still loss-making due to the low production volume for Nissan Sunny (Almera) and X-Trail.”

As at Friday, Tan Chong closed at RM1.80 – up by more than a quarter since the start of the year.