PETALING JAYA: Automotive stocks could get a continued upward bump if the ringgit’s recovery against the US dollar is sustained.
These stocks could add on to gains if consumers feel better about the economy and in turn ramp up spending on big-ticket items.
It was recently reported in Grant Thornton’s quarterly business survey that business leaders in Malaysia saw their optimism rising by 6% in the fourth quarter of 2017, a sharp rebound from a negative 36% a year ago.
The survey tracked 58% of business owners who are expecting an increase in profits, up 46 percentage points from the third quarter of 2017, and 30% of business owners who are looking to an increase in selling prices, an increase of 14 percentage points from the third quarter of 2017.
Analysts said that if spending by businesses picks up due to improving sentiment, it would only be a matter of time before consumer sentiment catches up.
However, they also highlighted that there could be a slight dampener from the recent interest rate hike.
Anyhow, these stocks are already starting to climb, taking their cue from the ringgit that appears to be regaining its mojo in the short term once again.
Auto stocks that see their performance closely linked to the ringgit’s movement include Tan Chong Motor Holdings Bhd , Bermaz Auto Bhd and UMW Holdings Bhd .
All such stocks have seen broad gains in their share price of late, with UMW leading the pack following a 31.15% year-to-date (YTD) gain in its share price to RM6.82 at the latest close.
UMW is the importer and distributor of Toyota cars, the second-biggest non-national car brand in Malaysia with a 13.2% country market share in December 2017.
A dealer said that UMW was benefiting from two factors: the improved sentiment due to the improved ringgit levels, and the positive perception on government-linked companies in the run-up to the 14th general election.
“This is the most likely reason why their gains were outsized compared to the rest,” he said.
Coming in second in terms of YTD share price gains was Tan Chong, the importer and distributor of Nissan cars in Malaysia, with a 21.28% gain to RM1.71 at the latest close.
Tan Chong had a 4.1% market share in the December 2017 Malaysian total industry volume (TIV), according to statistics compiled by the Malaysian Automotive Association (MAA).
Meanwhile, Bermaz Auto, which is a distributor of Mazda cars, saw a minimal 1.82% YTD gains to RM2.24 at the latest close. The stock, however, has already been on an overall upward trend since September 2017.
Whether the uptrend in these stocks can be sustained is also premised on how much TIV will grow.
Analysts said that with the continued proliferation of ride-sharing through Uber and Grab, TIV could still be kept in check in the short to medium term. “However, do note that from news reports, these ride-sharing companies such as Uber are still loss-making. It also means that the rides at such cheap prices may not be self-sustaining, moving forward. Discount coupons may not be so readily available eventually as well,” the analyst noted.
Against this backdrop, MAA is still expecting a growth of about 2.3% for TIV to 590,000 units for 2018 from 576,635 units last year, in line with the nation’s projected higher economic growth of 5% to 5.5%.
According to MIDF Research in a report last week, the rising ringgit is a ‘big positive’ for automotive companies and underpins its bullish call on the sector.
MIDF has “buy” calls on all three stocks: UMW, Tan Chong and Bermaz Auto with target prices of RM6.00, RM2.05 and RM2.50, respectively. It noted that its “buy” call on UMW is now “under review”.
The research house estimates that about half of the total component costs are imported for UMW Toyota (a unit of UMW) due to low localisation rates of between 20% and 60% from national makes of 80%-95%.
“UMW Toyota has large exposure to the US dollar, given that all its imported completely-knocked-down (CKD) kits and completely-built-up (CBU) units are transacted in US dollars,” MIDF Research said.
For Tan Chong, the research house estimates that 80% of its total import cost is in US dollars, with the rest being denominated in the Japanese yen.
“Every 1% change in the US dollar impacts our financial year 2018’s (FY18) forecast by 4.7% for UMW (Group) and 64% for Tan Chong. As Tan Chong’s earnings are close to break-even point, its bottomline is very sensitive to forex changes,” it said.
Tan Chong fell deeper into the red when it reported its third-quarter financial results ended Sept 30, 2017.
In its nine months to end September, its net losses widened by 44% from a year ago to RM81.6mil, while revenue dropped by 21.8% to RM3.3bil during the period.
MIDF Research said in an earlier report that it is expecting Tan Chong’s losses to narrow and gradually hit breakeven in FY18, followed by more meaningful earnings moving forward, following the recovery in the ringgit.
For Bermaz Auto, MIDF Research said that the company would benefit from the ringgit’s recovery versus the Japanese yen since 100% of its imports are denominated in the yen.
It noted that Bermaz Auto is exposed to the yen via CBU imports, while CKD models such as the CX5 and Mazda 3 are purchased at a fixed ringgit price from its 30%-owned Mazda Malaysia Sdn Bhd (MMSB), the importer and assembler of Mazda CKDs.
“To make this possible, MMSB absorbs the yen volatilities from CKD imports; which means that MMSB also benefits from the current recovery in the ringgit. We estimate that every 1% strengthening of the ringgit against the yen impacts Bermaz Auto’s FY18F earnings by 3%,” the research house said.