Stock Name: EPMB
Company Name: EP MANUFACTURING BHD
Automotive sector
Maintain neutral: We expect next year's total industry volume (TIV) to grow by 1.1% on the back of forecast GDP growth of 5.2%. Although the linear correlation between TIV and GDP growth is strong, we think the former's growth upside will be marginal because: (i) the replacement cycle for new vehicles that may give sales a boost has peaked; (ii) the upcoming models may not create enough excitement to sufficiently spur TIV growth; and (iii) consumer sentiment is deteriorating and buyers have become more frugal, which inevitably curtails spending on big ticket items.
We understand the government, together with consultants and industry players, is reviewing key aspects and policies pertaining to the sector in its efforts to drive investment in the manufacture of hybrids and electric vehicles and gradually phase out Approved Permits (AP).
The extension of the deadline for full exemption of excise duties and tax on hybrids and various incentives relating to the replacement of taxis are positive to the sector. However, Budget 2012's proposals could also potentially cap the upside on vehicle sales. The move to raise the price ceiling under the My First Home Scheme may lead to potential vehicle buyers putting a priority on owning a property over replacing their vehicles out of fear of rising property prices .
We still think there is more downside on some counters as their valuations have yet to see any significant price multiple compression. We also highlight the high risk of 2H earnings falling short of consensus expectations given the weakening ringgit, as well as high promotion expenses jacking up costs. The reversal in the ringgit (against the US dollar notably) has taken auto manufacturers by surprise as many had expected the ringgit to sustain its strong momentum.
With TIV remaining lacklustre, we think the sector will lack spark for a while. We are still firmly bearish on the larger caps, on which we have 'sell' calls, although we favour the small-cap autoparts makers in view of their beaten down valuations. Our top pick is EP Manufacturing Bhd (fair value: RM1.38) and Delloyd Ventures Bhd (FV: RM3.88). We maintain our 'neutral' stance on the sector. ' OSK Research, Oct 13
This article appeared in The Edge Financial Daily, Ocotber 14, 2011.
Company Name: EP MANUFACTURING BHD
| Research House: OSK | Price Call: BUY | Target Price: 1.38 |
Automotive sector
Maintain neutral: We expect next year's total industry volume (TIV) to grow by 1.1% on the back of forecast GDP growth of 5.2%. Although the linear correlation between TIV and GDP growth is strong, we think the former's growth upside will be marginal because: (i) the replacement cycle for new vehicles that may give sales a boost has peaked; (ii) the upcoming models may not create enough excitement to sufficiently spur TIV growth; and (iii) consumer sentiment is deteriorating and buyers have become more frugal, which inevitably curtails spending on big ticket items.
We understand the government, together with consultants and industry players, is reviewing key aspects and policies pertaining to the sector in its efforts to drive investment in the manufacture of hybrids and electric vehicles and gradually phase out Approved Permits (AP).
The extension of the deadline for full exemption of excise duties and tax on hybrids and various incentives relating to the replacement of taxis are positive to the sector. However, Budget 2012's proposals could also potentially cap the upside on vehicle sales. The move to raise the price ceiling under the My First Home Scheme may lead to potential vehicle buyers putting a priority on owning a property over replacing their vehicles out of fear of rising property prices .
We still think there is more downside on some counters as their valuations have yet to see any significant price multiple compression. We also highlight the high risk of 2H earnings falling short of consensus expectations given the weakening ringgit, as well as high promotion expenses jacking up costs. The reversal in the ringgit (against the US dollar notably) has taken auto manufacturers by surprise as many had expected the ringgit to sustain its strong momentum.
With TIV remaining lacklustre, we think the sector will lack spark for a while. We are still firmly bearish on the larger caps, on which we have 'sell' calls, although we favour the small-cap autoparts makers in view of their beaten down valuations. Our top pick is EP Manufacturing Bhd (fair value: RM1.38) and Delloyd Ventures Bhd (FV: RM3.88). We maintain our 'neutral' stance on the sector. ' OSK Research, Oct 13
This article appeared in The Edge Financial Daily, Ocotber 14, 2011.
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