Motor sector
Maintain overweight: We believe now is the best time to invest in local motor stocks as the sector is currently into its second year of a new three-year cycle that started in 2009.
A closer look at Malaysia’s total-industry-volume (TIV) reveals that the local motor sector has been moving in three-year cycles since 2000, that is from 2000 to 2002, 2003 to 2005, 2006 to 2008 and potentially we see this again for 2009 to 2011.
We believe the replacement cycle for motor vehicles, widely believed to be five to seven years, may have accelerated in recent years. Buyers may have been enticed by more new models.
Also, car owners may have realised that the resale value of their new cars can only be maximised if the cars are replaced within three years, given the shortened product life cycle of new models now.
We project Malaysia’s TIV to jump 9.5% (previously 8.9%) in 2010, followed by a decent 4% (previously 2.8%) growth in 2011 as we have revised our projections for Proton due to positive sentiment.
We believe our new TIV projection of 587,698 units in 2010 is achievable. TIV for the first five months in 2010 already made up 42% of our full-year forecast.
We have rolled forward our valuation base year for motor stocks to financial year ending 2010 (FY2011) from FY2010 previously. Tan Chong Motor Holdings, UMW Holdings Bhd and MBM Resources Bhd have December financial year-ends, while Proton Holdings Bhd which has a March year-end.
For Tan Chong, our indicative fair value has been raised to RM6.16 per share (from RM5.26 previously), which is now based on 14 times, FY2011 earnings per share (EPS). We maintain an outperform call.
Our SOP-based fair value for UMW has been reduced slightly to RM7.50 (previously RM7.52) based on 14 times price-to-earnings-ratio (PER) (previously 16 times PER) for its automotive and oil and gas divisions, eight times for its heavy equipment and seven times for its manufacturing division. We maintain our outperform call.
We have raised our EPS forecasts for Proton from 65.3 sen to 67.4 sen for FY2011 and from 70.2 sen to 75.2 sen for FY2012. We reiterate our outperform call on the stock with an indicative fair value of RM5.50 based on stripped down book value.
For MBM, our fair value was revised up to RM5.31 per share (from RM5.04 previously), based on 11 times FY2011 EPS. Reiterate outperform.
In terms of technical analysis for Tan Chong, at market close last Friday, it ended with an insignificant candle at RM4.23, suggesting a persistent sideways movement ahead.
Although the stochastic oscillators showed a fresh buy signal from the oversold region, the 10-day simple moving average (SMA) is due to cut below the 40-day SMA, this implies further rangebound trading ahead.
Technically, unless the stock breaks out from the current trading range, it is more likely to stay within the current levels. — RHB Research Institute, July 12
This article appeared in The Edge Financial Daily, July 13, 2010.
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