Weak new car sales
New car sales in the country remain lethargic. Total industry volume for the first ten months of the year is some 10% lower than the previous corresponding period. Currently, there’s little expectation for a strong recovery in the fourth quarter of 2006 (4Q06) and perhaps for the first half of 2007 (1H07) as well.
A confluence of factors – including rising cost of living and weak resale market – is keeping consumers from taking on the additional obligations of a new car. To compete for the shrinking pool of buyers, many car companies have resorted to promotions and price discounting. And the intensified sales and marketing expenses have taken their toll on profitability.
Thus, it’s unsurprising that outlook and market sentiment for the entire auto sector is poor. Nevertheless, MBM Resources (RM2.90) looks set to buck the declining profits trend. And its relatively low valuations offer a good buying opportunity.
…but Perodua doing well
Among the key marques, only Perodua is registering any material growth this year. The second national carmaker, Perusahaan Otomobil Kedua Sdn Bhd (Perodua), expects sales growth in the low to mid-teens, underpinned by strong demand for the Myvi.
It has overtaken Proton as the best-selling marque in the country, accounting for nearly 32% of total industry volume and 42% of the passenger car market. And should continue to do well.
Perodua plans to launch at least one new car in 2007, a one-litre model, and an upgraded Myvi. It’s in the midst of expanding plant capacity and should be able to raise production to 240,000 units by mid-2007.
The carmaker has gradually expanded its exports, which at the moment consist mainly of the Kelisa and Myvi, to markets like the UK and the Middle East. Perodua is also looking to sell its cars in Indonesia next year. Daihatsu, its controlling shareholder and a company under the Toyota stable, will likely use Perodua as one of its key regional platforms.
Modest valuation with dividends
MBM offers investors the most direct investment into Perodua, which accounted for almost 60% of MBM’s total pre-tax profit for the year-to-date, through its 23.6% effective stake.
The company’s earnings in the first nine months of 2006 were 64% higher than the previous corresponding period. For the full-year, we expect roughly 43.1 sen earnings per share.
That implies the stock is currently trading at a modest P/E (price-earnings ratio) of just 6.7 times – offering good upside potential. In addition, the company intends to maintain its dividend payout at 18 sen per share. That would give shareholders a fairly decent gross yield of 6.2% at the current price. The company’s underlying net tangible asset stood at RM2.69 apiece.
Aside from Perodua, MBM also holds stakes in several franchises including the distribution of Daihatsu commercial vehicles and heavy vehicles, Hino as well as auto parts manufacturing outfits. The latter has done quite well in the latest 3Q06. It recently raised its stake in Federal Auto, which sells Volvo luxury cars, to 69.6%. – InsiderAsia
