We maintain our UNDERWEIGHT rating on the AUTOMOTIVE sector given the outweighing of UNDERPERFORM ratings in the total market capitalisation of our stock coverage coupled with the lack of re-rating catalyst for 2016 as well as rising costs and poor consumer spending. MAA’s TIV sales for December 2016 registered at 64,822 (+32% MoM, -7% YoY). As a result, 2016 TIV closed at 580,124 units, (-13%) comprised 102% of our 570,000 unit forecast for 2016. We believe the negative momentum was mainly due to higher base in 2015 with the pre-emptive buying before GST and the 2016 price hike. Looking forward into 2017, we maintain our estimates of 610,000 units with a limited growth of 7% YoY with a wider range of new models launched during prior year on top of the aggressive sales campaigns by auto players. However, our view remains conservative given the prevailing weakness in consumer sentiment as well as the unfavourable import costs that are corroding automakers profitability, and the lack of rerating catalysts for the sector. We continue to favour BAUTO (OP; TP: RM2.36), for its: (i) better top line growth prospect from a low base on the back of strong pipeline of exciting models, (ii) potential dividend pay-out of c.90% (c.7.2% div. yield), and (iii) recent price hike up to RM6,000 for 2017 for Mazda cars.

December 2016 TIV came in strongly at 64,822 units (+32% MoM and -7% YoY), bringing the 2016 TIV to 580,124 units which came in 1.8% above our forecast of 570,000 units. Stronger sales in December 2016 was expected given the wide range of models launched in prior months on top of the aggressive sales campaigning by auto players during the year-end period to make up for the slow sales during the year. Whereas, the whole year negative momentum was mainly due to higher base in 2015 with the pre-emptive buying before GST and 2016 price hike. The YoY weakness in the Passenger segment (-13%) demonstrated the continued pressure felt by consumers in relation to tighter lending requirements and higher living expenses, as compared to 2015, which appeared to have affected Mazda (-56% YoY) and Toyota (-39% YoY). This is also attributed to the higher base in Dec 2015 where there were heavy pre-emptive purchases in view of price hikes implemented by most auto players in Jan 2016. On the outperformers in MoM sales terms, Nissan struck the unexpected highest growth of 63% on back of its aggressive campaign, followed by Perodua (+59%) with its first sedan, Perodua Bezza. On the underperformers in MoM sales terms, Mazda declined the most, by 22%, likely the result of slower vehicle delivery from the temporary closure of a contractor’s assembly plant, in addition to their low base, which extended its YoY weakness (-56%).

Looking forward into 2017, we maintain our estimate of 610,000 units with a limited growth of 7% YoY. This is in line with our conservative view with consumer purchases for automobiles being clamped by stringent lending guidelines as well as prevailing weakness in sentiment resulting from higher living expenses. In addition, automakers have been experiencing a pinch in their profit margins with operating costs being pressurised by unfavorable forex. Furthermore, there is a lack of rerating catalysts to bring about any significant shift in the sector. That being said, TIV sales numbers going forward are likely to be driven by the models launched in 2H16, such as the Perodua Bezza, the Proton Saga, the new Proton Persona and Ertiga, the new Honda Civic and the face-lifted Toyota Vios with the new Innova. Forthcoming model launches are the new Honda BRV, the face-lifted City, Jazz, face-lifted Camry, and face-lifted Perodua Axia,

BAUTO (OP; TP: RM2.36) remains our top pick for the sector. Though we had recently cut our earnings prospect for the stock in view of its high exposure to the Japanese Yen which has been trailing at high levels over the past several months, we believe it may yet outperform its peers given that its targeted customer base in the middle-income to high-income bracket are less sensitive to the rising cost of living. More positively, the recent management buyout could also remove the overhang on its shares while a positive knee-jerk reaction could be reflected in the share price in the foreseeable future. We also see high potential value to be unlocked with the proposed listing of its Philippines subsidiary given the robust growth prospect. All in, we are still optimistic with its investment merits supported by: (i) better top line growth prospect from low base on the back of strong pipeline of exciting models, and (ii) potential dividend pay-out of c.90%, which translate into fair dividend yield of c.7.2%, and iii) recent price hike up to RM6,000 for 2017 Mazda cars. BAUTO is currently trading at 10.8x FY18E PER.

We also would like to highlight the re-rating of UMW (OP; TP: RM5.28 from UP; TP: RM4.27) following the propose demerger of UMWOG through a Proposed Distribution. UMW’s results has been dragged by losses contributed from its oil and gas segments (from UMWOG and the group’s other O&G related divisions, i.e. onshore drilling services, manufacturing of oil country tubular goods (OCTG), anti-abrasion coating services for OCTG) and the proposed demerger should unlock shareholder value, absent the poor performance from these segments. We change our valuation methodology for the stock from SoP valuation to an applied 12.0x PER to our revised FY17E EPS of RM0.44, where earnings are exclusive from O&G segment earnings, which was valued at 0.5x PBV separately

Source: Kenanga Research - 20 Jan 2017