Auto stocks seen picking up speed

Analysts expect jump in car sales in two-three months due to temporary tax holiday

THERE was a palpable sense of urgency among quite a number of Malaysians earlier this week, reflected in the surge of interest in wanting to buy a car.

During a meeting with a corporate figure a few days ago, he cut short our meeting as he needed to go pick out his BMW.

“It’s cheap now. BMW is offering a 10% discount,” says this car-loving corporate person.

A check with BMW shows that the savings for the purchase of new BMW vehicles range from RM9,992 for the BMW 118i Sport and up to RM69,877 for the mid-engine, plug-in hybrid i8.

This corporate figure isn’t the only one. Over the last few days, a few people have said they were going to check out car prices or get a new car.

This follows the announcement by the Pakatan Harapan government to fix the GST at 0% from June 1 onwards.

Many automobile companies have already announced zero-rated GST prices, and the savings for car buyers are rather substantial.

“There are savings of some RM15,000 or almost 9% for the Toyota Hyrid Camry.

“It’s a good time to buy,” adds another corporate person who had just called the Toyota sales centre.

This would roughly lower its on-the-road price, excluding insurance, from RM170,000 to RM155,000.

So not surprisingly after being in the backburner for the longest time, auto stocks are suddenly in the spotlight.

Analysts are now expecting car sales to jump in the next two or three months, following this temporary tax holiday.

The auto stocks on the Malaysian bourse would be Bermaz Auto Bhd, DRB Hicom Bhd, MBM Resources Bhd (MBMR), Sime Darby Bhd, Tan Chong Motor Holdings Bhd and UMW Holdings Bhd.

Among these stocks, the stock with the cheapest valuation would be MBMR, which is just trading at a forward price earnings ratio of only eight times.

Currently, DRB Hicom and Tan Chong Motors are loss-making.

The rest are trading at PEs ranging from the high teens to the twenties.

Based on analyst estimates, all the auto stocks, save for MBMR and DRB Hicom, are expected to trade at a one year forward PE of roughly 20 times and above, which doesn’t make them cheap.

Most auto analysts, though, favour MBMR for obvious reasons – its 22.58% stake in Perusahaan Otomomobil Kedua Sdn Bhd (Perodua).

Perodua is the leading automotive segment in the country with a 41% market share.

MBMR is also a distributor of other marques such as Mitsubishi, Volvo and Daihatsu.

It also assembles and distributes Hino trucks.

Kenanga Research likes MBMR with or without a merger and acquisition angle.

Diversified conglomerate UMW Holdings Bhd has proposed to become the largest shareholder in Perodua via two proposals which will result in the government-linked conglomerate having a 70.6% in Malaysia’s leading carmaker.

Car discounts

Based on Kenanga’s FY18 profit forecast of RM106.1mil and attaching a price earnings ratio of 12 times, that MBMR stake is valued at RM908.7mil.

MBMR is currently trading at an undemanding 8.7 times 2018 PER compared to the 5-year forward average of 11 times.

Affin Hwang Capital analyst Brian Yeoh in his report believes the sector’s outlook over the coming quarters will be better on a few reasons.

“We believe the sector’s outlook will be better in the coming quarters on a temporary boost from the cheaper zero-rated GST car prices, strong pick-up in consumer spending, aggressive models, and sustained strength of the ringgit.

It has “buy” calls on Sime Darby, BAuto and MBMR.

His 2018 TIV forecast remains unchanged at 582,400 units.

The zero-rating of GST takes effect from June 1 and will eventually be replaced by the sales and services tax (SST) – likely within the next two to three months. For now though, no date has been given for the return of SST.

It is on the back of this 6% to 10% reduction in car prices that the sales volume for May 2018 is expected to be higher than April 2018. This will be further supported by the Hari Raya festive season promotional campaigns.

When GST was first implemented on April 1, 2015, car prices had in fact already dropped.

This was because prior to the implementation of the GST, the 10% sales and services tax (SST) hiked up car prices.

When the SST was replaced with the new 6% GST back then, there was a 4% difference, making cars relatively cheaper.

“Nonetheless back then in 2015, our ringgit was a lot weaker. Many of the carmakers didn’t offer the entire 4% difference as a discount. They kept a 2% buffer for the ringgit,” he says.

Thus car prices dropped by 2% net when the GST was first announced.

Now though, with the ringgit expected to be on the uptrend, carmarkers are likely giving a larger discount, hence enabling the cost savings to range between 6% to 10%.

Among the carmakers, Perodua is leading with 41% market share and is seeing double digit sales growth driven by higher deliveries of the all-new Perodua Myvi.

Kenanga Research says that currently, the all-new Perodua Myvi bookings have hit 70,000 units, with 38,000 units delivered.

Then there is number two player Honda which has a market share of 17%, which is now seeing lower sales growth as consumers hold back in anticipation of new launches in the second half of this year.

Thirdly there is Toyota, which has a declining market share of 10%. Consumers are also holding back in anticipation of the new Toyota Rush and face-lifted variants of its bestselling models Vios and Innova.

Down the pecking order there is Proton and Nissan, with a lower market share of 9% and 4% respectively, due to the lack of new model launches. Figures wise, in April, total industry sales volume (TIV) rose by 10.2% year on year (y-o-y) to 47,100 units on higher demand for passenger vehicles, driven by stronger demand for Perodua car models (38.7% y-o-y).

Yeoh in his report notes that continental cars reigned versus Japanese cars during the period.

Both BMW and Mercedes-Benz’s four months to 2018 (4M18) TIV rose by 12.6% y-o-y and 18.8% y-o-y respectively.

Cumulatively, the continental car marques’ 4M18 rose by 14.4% y-o-y to 8.3k units, affirming our belief that the increasingly affluent consumers are “trading up” to more expensive non-national alternatives.

He said that the Japanese car marques’ 4M18 TIV saw a decline of 9.7% y-o-y as he believes the mid-range segment was affected by weak consumer spending.

Nevertheless, Mazda (BAuto) was a winner amongst the Japanese car marques – 4M18 TIV surged 48.7% y-o-y, driven by higher demand from its new Mazda CX-5 model.