Tan Chong Motor Holdings Bhd (April 9, RM4.53)
Maintain outperform at RM4.01, target price raised to RM7: After being restrained by a family tussle which eventually led to a three-year hiatus between 2004 and 2006 in the release of new models, Tan Chong is back on an aggressive expansion track as it looks to regain lost ground.
The stars are aligned for Tan Chong against the backdrop of an upturn in consumer sentiment, the continued strength of the company's existing models and the launch of new models that will continue to propel its topline.
Meanwhile, the stronger ringgit, better sales mix and increasing economies of scale will provide another kicker to the company's earnings.
Although earnings contribution will be minimal in the early stages of Tan Chong's penetration into the Indochina markets, these moves will increase the company's visibility in the region.
More importantly, it strengthens Tan Chong's position as a representative for Nissan, not just within Malaysia, but in the region as well, allowing it to work towards becoming a regional supply chain manager for the principal. Last year, Tan Chong's share price shot up 169%, outperforming the FBM KLCI's 45% gain. So far this year, the share price has climbed another 29% versus the KLCI's 6%, stoked by active news flow on the company's expanding footprint in Indochina.
Despite the recent share price surge, we still see significant value in the stock. The company is trading at a forward price earnings (PE) of only eight times, on par with its historical average of eight times, but still at a 27% discount to its upcycle PE of 11 times.
We think this is not justified as the company is now in a much stronger position in view of its wider product range and penetration into new market segments, larger market share, and rising prominence in the region.
Its balance sheet is solid and the company's hire purchase securitisation plans help quicken its cash-to-conversion cycle and keep the gearing level at manageable levels despite its aggressive expansion plans.
More importantly, the company's earnings growth potential over the next three years, backed by its growth plans and stronger industry fundamentals, is impressive, with an earnings per share compound annual growth rate (EPS CAGR) of 47%, transforming Tan Chong into a high-growth stock.
Gross dividend yields are also decent at 4%. There could be further upside to dividends should Tan Chong targets for a 20% return on equity (ROE). We believe the market has not factored in Tan Chong's strong earnings growth potential or fully appreciated the transformation that it is going through.
We are raising our target PE for Tan Chong from 12 times, a 10% discount to UMW auto division's 13.5 times target PE, to 13.5 times. Despite its much smaller market share and earnings base, we think Tan Chong deserves to trade at the same level as UMW's auto division given its superior earnings growth prospects.
This, coupled with our 38% to 62% upward revisions in FY2010 to FY2012 earnings, raises our sum of parts-based (SOP) target price from RM4.55 to RM7.
Our target implies a whopping 75% upside from current share price level. Tan Chong is firmly an outperform and our top pick in the sector.
Investors with high risks appetite can consider Tan Chong's two call warrants. - CIMB Research, April 9
This article appeared in The Edge Financial Daily, April 12, 2010.
Maintain outperform at RM4.01, target price raised to RM7: After being restrained by a family tussle which eventually led to a three-year hiatus between 2004 and 2006 in the release of new models, Tan Chong is back on an aggressive expansion track as it looks to regain lost ground.
The stars are aligned for Tan Chong against the backdrop of an upturn in consumer sentiment, the continued strength of the company's existing models and the launch of new models that will continue to propel its topline.
Meanwhile, the stronger ringgit, better sales mix and increasing economies of scale will provide another kicker to the company's earnings.
Although earnings contribution will be minimal in the early stages of Tan Chong's penetration into the Indochina markets, these moves will increase the company's visibility in the region.
More importantly, it strengthens Tan Chong's position as a representative for Nissan, not just within Malaysia, but in the region as well, allowing it to work towards becoming a regional supply chain manager for the principal. Last year, Tan Chong's share price shot up 169%, outperforming the FBM KLCI's 45% gain. So far this year, the share price has climbed another 29% versus the KLCI's 6%, stoked by active news flow on the company's expanding footprint in Indochina.
Despite the recent share price surge, we still see significant value in the stock. The company is trading at a forward price earnings (PE) of only eight times, on par with its historical average of eight times, but still at a 27% discount to its upcycle PE of 11 times.
We think this is not justified as the company is now in a much stronger position in view of its wider product range and penetration into new market segments, larger market share, and rising prominence in the region.
Its balance sheet is solid and the company's hire purchase securitisation plans help quicken its cash-to-conversion cycle and keep the gearing level at manageable levels despite its aggressive expansion plans.
More importantly, the company's earnings growth potential over the next three years, backed by its growth plans and stronger industry fundamentals, is impressive, with an earnings per share compound annual growth rate (EPS CAGR) of 47%, transforming Tan Chong into a high-growth stock.
Gross dividend yields are also decent at 4%. There could be further upside to dividends should Tan Chong targets for a 20% return on equity (ROE). We believe the market has not factored in Tan Chong's strong earnings growth potential or fully appreciated the transformation that it is going through.
We are raising our target PE for Tan Chong from 12 times, a 10% discount to UMW auto division's 13.5 times target PE, to 13.5 times. Despite its much smaller market share and earnings base, we think Tan Chong deserves to trade at the same level as UMW's auto division given its superior earnings growth prospects.
This, coupled with our 38% to 62% upward revisions in FY2010 to FY2012 earnings, raises our sum of parts-based (SOP) target price from RM4.55 to RM7.
Our target implies a whopping 75% upside from current share price level. Tan Chong is firmly an outperform and our top pick in the sector.
Investors with high risks appetite can consider Tan Chong's two call warrants. - CIMB Research, April 9
This article appeared in The Edge Financial Daily, April 12, 2010.
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