CIMB Research upgrades Tan Chong to Add, higher target price

CIMB Equities Research has upgraded Tan Chong Motor Holdings (TCM) to Add with a higher target price of RM2.

KUALA LUMPUR: CIMB Equities Research has upgraded Tan Chong Motor Holdings (TCM) to Add with a higher target price of RM2 from RM1.67 following the improving earnings outlook for the automotive group.

It said on Monday the new target price was based on 14 times CY19F price-to-earnings (P/E), in line with its sector P/E target. 

“We switch our valuation method from 0.38 times price-to-book value (P/BV) to P/E to reflect the improving earnings outlook for the group. 

“The stock trades at 0.4 times CY18F P/BV, more than two standard deviation below its historical mean. We see widening losses in Cambodia, Laos, Myanmar and Vietnam markets and ringgit weakness as key downside risks,” it said.

Tan Chong’s EBITDA in 1Q18 rose to RM58mil (vs. RM13mil in 1Q17), driven by stronger contribution from the Malaysian operations on the back of favourable forex following the appreciation of the ringgit against US$. 

As a result of higher operating leverage, TCM posted RM14mil core net profit in 1Q18 compared to RM31mil core net loss in 1Q17. 

“This is the first time in six quarters that TCM has turned a profit,” it pointed out.

Revenue in 1Q18 fell 3.8% quarter-on-quarter due to lower sales volume from its Malaysian operations as total passenger and commercial vehicles sold for Nissan fell by 17% quarter-on-quarter. 

In spite of the lower sales, TCM managed to record a profit on the back of favourable forex and lower effective rates. 

CIMB Research sees TCM as one of the beneficiaries of the new government’s proposal to reduce excise duties on imported cars below 1,600cc for first-car buyers. 

Moreover, it expects the overall automotive sector to benefit from the government’s announcement it will reduce the Goods & Service Tax (GST) from 6% to 0% on June 1, 2018. 

The group announced in early-May 2018 that it planned to establish a new automotive and commercial vehicle hub in Bagan Datuk, Perak, with a total investment value of up to RM500mil. 

TCM plans to start the first phase with an initial investment of RM100mil, which will be channelled towards land acquisition and the construction of a bus and truck plant. The new facility will allow TCM to cater to domestic and export markets.