The outlook for automotive sales was limited for the next year moving forward as the current industry scenario is lackluster on the back of weak sales and foreign exchange pressures.
RHB Research Institute Sdn Bhd (RHB Research) analyst Alexander Chia revealed, “The September quarter was dismal for earnings. Four of the six auto stocks under our coverage reported earnings that were below expectations.
“We expect the total industry volume (TIV) to remain flat in 2012 with auto sales estimated at 607,000 units. Although the new model pipeline looks strong, the expected slowdown in the economy will likely put a dent on consumer discretionary spending with some potential buyers possibly opting to postpone purchases or trade down to a less expensive model,” he opined.
Although Proton Holdings Bhd (Proton) and DRB-Hicom Bhd (DRB) were broadly in line with RHB Research’s expectations, both suffered from large year-on-year (y-o-y) decline in earnings.
Proton’s earnings for the first half of financial year 2012 ending March (1HFY12) declined 87 per cent y-o-y due to losses at Group Lotus from expenses associated with its ongoing five-year turnaround plan.
The national carmaker’s market share of the industry was 27.1 per cent year-to-date (January to October), trailing Perodua which had a 28.9 per cent share over the same period.
Despite maiden associate contributions from Pos Malaysia, DRB’s 1HFY12 earnings fell 33 per cent y-o-y due to the 9.6 per cent decline in automotive profit from weaker earnings at 34 per cent owned Honda Malaysia and higher effective tax rates.
The strength of the yen was blamed for some of the weaker earnings at APM Automotive Holding Bhd and MBM Resources Bhd (MBM).
MBM’s 23.6 per cent-owned associate Perodua saw margins squeezed by the higher yen resulting in nine month 2011 associate earnings falling 15 per cent y-o-y despite Perodua sales volumes only falling 9.9 per cent y-o-y.
UMW Holdings Bhd’s third quarter of 2011 earnings were blighted by lower contributions from Perodua, continued losses at 22.3 per cent owned WSP Holdings Ltd, and other losses related to its various subsidiaries.
Chia had a mixed outlook for 2012, starting with the prospects for 4Q11 looking ‘unexciting’ due to the seasonal sales weakness arising from consumers’ preference to register their vehicles in the new year.
Supply constraints due to the floods in Thailand could also mean fewer compelling year-end sales promotions to entice buyers.
He listed the risks to the forecast, namely a stronger economy lifting car sales and favorable foreign exchange trends.
“We remain cautious on the prospects for stocks in the sector going into 2012. In addition to limited headroom for significant TIV growth in 2012, the key risk for the sector is margin compression arising from the recent strength of the yen and US dollar,” he stated.
For investors with a larger risk appetite the research firm pegged Proton with a fair value RM5 per share on the back of potential merger and acquisition activity.
Originally posted: TheBorneoPost
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