Kenanga IB Research maintains Neutral on Automotive sector

by **Cals** Wed 09 Oct 2013, 09:28

Business & Markets 2013

Written by theedgemalaysia.com

Wednesday, 09 October 2013 08:49

KUALA LUMPUR (Oct 9): Kenanga IB Research has maintained its Neutral rating on the Automotive sector and said that despite the year-to-date (YTD) August total industry volume (TIV) growth of 5% year-on-year (y-o-y), the research house was keeping its 2013 TIV forecast of 636,560 units (+1.4% y-o-y) as it anticipates the growth pace to slow down in the remaining months due to the high base in 4Q2012 as well as the upcoming subsidy rationalisation that might dampen consumer sentiment. Our recent channel checks suggest that the revised NAP (to be announced in 4Q2013 based on market talk) will focus mainly on positioning the country as a regional production hub for hybrid vehicles and EEV.
In a note Wednesday, the research house said that in view of more manufacturing licenses and pre-packaged customised incentives to be offered to attract the foreign OEMs, it would likely benefit all the auto players over the long-term through partnerships as well as affiliations with foreign car makers.
Kenanga Research said that for the upcoming Budget 2014, if GST was implemented, this would be Marginally Positive to the Automotive sector as GST will replace the sales tax (of 10%) and thus lowering On The Road (OTR) car prices marginally.
“This may potentially lend strength to higher demand, in our view,” it said.
Nevertheless, the research house said the mildly positive catalyst was not enough to compel it to change its Neutral view as it believes the impact could easily be offset by the recent fuel price hike and further subsidies rationalisation plan.
“We continue to like Tan Chong (TP: RM7.50) in view of its undemanding valuation (which is currently trading at 12.5x FY14 PER). Tan Chong remains our top pick for the sector as we believe it should deserve a higher valuation given: (i) its potential NP growth averaging c.46% p.a. in FY13E and FY14E; (ii) strong Nissan expansion, and (iii) overwhelming response for its existing models.
“Meanwhile, we are maintaining our Market Perform ratings on DRB-Hicom (TP: RM2.69) and UMW (TP: RM13.39) while keeping our Underperform rating on MBM Resources (TP: RM3.66),” it said.