THE BUZZ
Following its earlier MOU in June last year, Tan Chong Motor
(TCM) finally announced that its 70%-owned subsidiary, Tan Chong Motor
Assemblies SB (TCMA), has secured a contractual assembly agreement with its
sister company, TC Subaru, which is owned by
Tan Chong International Ltd. The
expected total assembly charges and related localisation fees payable by TCS to
TCMA for duration of the agreement is estimated at RM30.22m. TCMH told Bursa
Malaysia that the agreement, which took effect yesterday up to 31 Dec, 2013,
has an option for extension. The capex will solely be borne by TC Subaru.
OUR TAKE
What the contract
entails. We understand that the Subaru model that is likely to
be assembled could be the latest SUV, the Subaru Compact XV (see pic
below), with a likely target of 5000 units catering to the ASEAN market. Tan Chong International,
a sister company of TCM, shares a common shareholder. At RM30m, this translates
into revenue of RM6044 per car assembled, which is below the earlier guidance
for RM9000 per car set, taking into consideration that it is a related party
transaction.
Minimal impact on
earnings. Management had earlier guided that production will likely commence
sometime in October 2012. Hence,
the initial contribution to its bottomline would be minimal. For 2013,
however, we estimate the contribution to TCM’s earnings to be RM3m-RM5m, which is still very
small in relation to its forecast bottomline of RM260m for FY12. What is more significant is that the assembly agreement
will raise the capacity utilization at
the company’s Segambut plant by 15%. The plant is currently under-utilized
since most of TCM’s vehicles are now produced at the Serendah
plant. Hence, there could be further cost savings on unit fixed costs. Maintain
NEUTRAL. We maintain our earnings, as well as our FV of RM4.00, which is pegged
to 10x FY12 EPS, in line with the sector average.
Source: OSK188
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