Highlights

• HIL Industries Bhd is planning to relocate its subsidiary's automotive headlining manufacturing operations to a permanent facility in three-to-five years that will allow it to expand its customer base locally and abroad.

• The group expects to incur about RM15.0 mln in capex for the new facility, while each additional line will cost some RM5.0 mln. Currently, the group’s unit, HIL-Edrola Sdn Bhd is running its operations at the group’s existing facilities, together with Indonesian firm PT Dasa Windu Agung (DWA).

• Perodua is envisaged to remain as HIL’s key customer in the coming years, on the back of steady demand for auto parts used in Perodua’s newest generation of MYVI and the newly launched Aruz sport utility vehicle.

• We are positive on the capex spending as increased orders will improve HIL’s earnings visibility, in-tandem with slightly improved floor utilisation and higher revenue. However, we think that contribution from the Perodua Aruz is unlikely to be significant at the current juncture, due to smaller-sized orders at the initial stage of production.

• We maintain our HOLD call on HIL with an unchanged target price of RM0.70, in-view of the continuing slowdown in property sales – a key net profit driver and increasing costs. We also remain cautious of the continuous underperformance of HIL’s Chinese unit with overall production utilisation at just 48%-50%.

Prospects

Moving forward, HIL-Edrola’s maiden order is expected to come from Perodua’s newly launched Aruz sport utility vehicle (SUV). In the meantime, the group is also negotiating with several other automakers in Malaysia for the supply of headliners (i.e.: the fabric attached to the roof of automobiles).

Initial production is expected to commence progressively and at low volumes, while future volume strength will be tied to the overall market reception of Perodua Aruz. Domestically, Perodua aims to achieve sales volume of about 31,200 units by end-2019 for Perodua Aruz.

The group also hopes to construct a separate plant for HIL-Edrola in three years’ time, which would allow HIL to increase its local customers and facilitate the potential expansion into other Southeast Asian markets.

On that note, Vietnam has been identified as a key focus market, mainly due to its growing automotive industry that offers significant growth prospects. The expansion strategy is also in-line with its Indonesian partner DWA’s strategy to include Vietnam in its future expansion plans.

HIL’s revenue is expected to increase over the longer term on higher auto parts orders from Perodua, although margins could potentially be limited by higher resin prices, electricity costs and wage hikes. Other key catalysts include stronger-than-expected demand for Perodua Myvi and Aruz, as well as significant growth in the domestic auto industry.

Valuation and Recommendation

Our target price is premised on a sum-of-parts (SOP) approach, ascribing an unchanged target PER of 9.0x to its 2019 (previously 2018) manufacturing business and a discount of 50% (unchanged) to the revalued net asset value (RNAV) estimate of HIL’s property unit.

The target PER is similar to other small-to-mid cap peers and is at a slight discount to its closest competitor, APM Automotive Holdings due to the latter’s larger market capitalisation.

Downside risks to our recommendation include the unexpected volatility in raw material prices, labour shortages, weak consumer sentiment which could deter big-ticket spending and tighter financing regulations that could affect both automobile and property sales.

Source: Mplus Research - 28 Jan 2019