Analysts say appreciation will improve players’ earnings, operating environment
New Straits Times

22 Sep 2017


THE ringgit’s strength vis-a-vis the US dollar and yen, particularly in the past month, works well for automotive companies Tan Chong Motor Holdings Bhd, UMW Holdings Bhd and Bermaz Auto Bhd, said analysts.

They believe the ringgit’s appreciation will further improve the automotive players’ core operating environment and earnings in the 2018 financial year.

Maybank Investment Bank Bhd (Maybank IB) said the ringgit’s strength against the dollar and yen is good news for importers, including automotive players.

However, due to the three to six months’ advanced purchase of completely knocked-down (CKD) components by the automotive players, the benefits of the stronger ringgit would only be felt from the fourth quarter.

Maybank IB analyst Ivan Yap said other than the strengthening of the ringgit, the key catalysts to earnings improvement in the 2018 financial year include higher hire-purchase loan applications and approval rates by banks.

“Most listed automotive stocks have seen share price underperformance relative to the FTSE Bursa Malaysia KLCI over the past two to three years as the ringgit weakness against the dollar and yen had affected auto earnings negatively.

“Despite the local currency’s recent gain and total industry volume’s (TIV) four per cent year-on-year rebound in the first eight months, most auto stocks continue to underperform.

“We believe that the recent uptick in hire-purchase loan applications and approval rates by the banks, alongside the recovering ringgit, are opportunities to position for a recovery in both TIV and earnings,” he said.

Rakuten Trade research head Kenny Yee said the stronger ringgit is beneficial to those that carry more completely built-up (CBU) variants.

“We remain optimistic about the ringgit.”

Bank Islam chief economist Dr Mohd Afzanizam Abdul Rashid believes the ringgit will continue to appreciate gradually against the greenback, with the year-end target of between RM4.10 and RM4.20.

“The appreciation of the ringgit will come because of the uncertainty over the United States Federal Reserve rate hike. Things may change if the market believes the hike is going to be higher than expected.”

MIDF Research said Tan Chong, which pays 80 per cent of its imported components in the US dollar, is expected to see its 2018 financial year earnings affected by 16 per cent for one per cent change in the greenback.

Meanwhile, the stronger ringgit against the yen is favourable to Bermaz Auto as all its imports are exposed to the yen, said the firm.

Bermaz Auto is Maybank IB and MIDF Research’s top “buy” pick for its strong balance sheet and asset-light business model.

“With interesting new models ahead to lift earnings, we believe that Bermaz Auto is back on an earnings growth trajectory,” said Yap, who also likes MBM Resources Bhd for its Perodua exposure and Tan Chong for its trough valuations on a price-tobook value perspective.

MIDF Research said other key catalysts for Bermaz Auto include the estimated 30 per cent year-on-year increase in the 2018 financial year TIV, more than doubling in associate earnings contribution to the group given a massive export market expansion as well as value unlocking of Bermaz Auto Philippines.

On UMW Toyota Motor, a unit under UMW Holdings Bhd, MIDF Research said it has the largest exposure to the US dollar as all its imported CKD kits and CBU units from Thailand are transacted in the currency.

“Given low localisation rates of between 20 and 60 per cent relative to the national makes of 80 and 95 per cent, we estimate around half of total component costs are imported,” it said.

MIDF Research remains optimistic of UMW Holdings, brought about by the demerger of its oil and gas unit as well as a reversal of market share loss, structural cost reduction and pricing advantage from UMW Toyota’s energy-efficient vehicle strategy.