Stronger ringgit good for auto players

PETALING JAYA: The strengthening of the ringgit against the greenback to its highest in 10 months, as well as the local currency rising against the Japanese Yen, bodes well for auto players, according to MIDF Research which has a bullish view on the sector.

"The current development underpins our bullish stance on the sector and our view that FY17 earnings will be backloaded on the back of more aggressive launches and the ringgit strength in the second half of the year," the research house said.

The ringgit rose to RM4.19 against the dollar on Friday, in line with MIDF's in-house target of the ringgit settling at RM4.20 against a dollar by the end of the year.

As for the local currency's standing against the Yen, the ringgit stood at RM3.89 against 100Yen on Friday, which was above MIDF's year-end target of RM3.90.

Among auto players, MIDF expects Bermaz Auto Bhd, UMW Holdings Bhd and Tan Chong Motor Holdings Bhd to be key beneficiaries of the favourable foreign exchange situation.

Bermaz Auto emerged as a top pick for MIDF on the back of a "solid 41% earnings compound annual growth rate (CAGR), attractive 7% yield and value crystallisation of its Philippines unit".

MIDF opines that every 1% change the ringgit makes against the Yen, will impact Bermaz's earnings by 3% for FY18.

Besides that, the Mazda brand dealer is also set to benefit from the ringgit's gain against the Yen, as its imports of the CBU are fully exposed to the currency.

"Bermaz is exposed to the Yen via (complete built units) CBU imports, whereas (completely knocked down) CKDs i.e. the CX5 and Mazda 3 models are purchased at a fixed ringgit price from 30%-owned Mazda Malaysia Sdn Bhd (MMSB), which is the importer of Mazda CKD kits and assembler. To make this possible, MMSB absorbs Yen volatilities from CKD imports, which means that MMSB also benefits from the current ringgit strength," it added.

In addition to that, MIDF's expectation for Bermaz includes an increase in total industry volume by 30% due to new launces, increase in earnings of associate companies, and unlocking of value through the potential listing of its Phillippines unit.

As for UMW Holdings auto arm, UMW Toyota Motor Sdn Bhd, MIDF which posted a BUY call at a target price of RM7.20, said every 1% change in the USD will impact its FY18 earnings by 4.7%.

"UMW Toyota has the largest exposure to the USD given that all its imported CKD kits and CBUs from Thailand are transacted in USD. Given low localisation rates (of between 20%-60%) relative to the national makes (of 80%-95%), we estimate around half of total component costs are imported," MIDF said.

Restructuring on a group level through a demerger exercise will also enable the distributor of the Toyota brand to deleverage its balance sheet, reverse prior years market share loses and reduce structural cost among others.

Loss making Tan Chong Motors on the other hand, appears to be more sensitive to forex changes, as a 1% change in USD will impact Tan Chong by 16%.

As for national makes, Perodua is expected to undergo 1% change in earnings, parallel to the changes in the Yen.

Going forward, more launches are on the cards from all four players.