Thursday 16 August 2012

Tan Chong Motor Holdings - The Worst is Over; Almera to be The Saviour


The calamities of last year coupled with slow model launches have put a dent on Tan Chong Motor (TCM)’s earnings. The company reported its fifth consecutive disappointing quarter. Nonetheless, q-o-q numbers have improved significantly and we see earnings to improve going forward. While we are downgrading TCM’s FY12 numbers, we are raising its FY13 earnings, which we expect to grow by 52% y-o-y. We see its entry into the un-penetrated B segment market with the upcoming launching of the Nissan Almera to be an earnings kicker.  Upgrade to BUY from SELL with a FV of RM5.52.
Trailing estimates. The calamities of last year coupled with slow model launches have put a dent on TCM’s earnings, which reported another set of weak results, marking its fifth consecutive quarter of disappointments. The company’s 1HFY12 core earnings of only RM80.5m accounted for only 36% and 32% of our and street estimates respectively. Core earnings plunged by 38% YTD, while 2Q core earnings are weaker by 11% y-o-y.
Earnings to improve. Q-o-q numbers have improved significantly by 72% despite revenue coming in flat.  The improved earnings were attributed to the recovery in the parts supply shortage and increase in production units to meet backlog orders, which has lowered booking retention costs q-o-q. We anticipate sales to be stronger over the ensuing quarters ahead of the festive season coupled with the boost in volume from the upcoming launch of the Almera sometime next month. As a result to the disappointing set of results, we therefore trim our FY12 earnings by 11%. Management emphasized that its bottom-line may catch up in the coming quarters to end the year only slightly depressed. We forecast FY12 core earnings to see a contraction of 7.3%.
Almera the saviour. We foresee that the Nissan Almera will not disappoint us as the Nissan Teana had last year. TCM’s first B segment offering, the Almera, will be priced competitively at a range of RM70k-RM85k depending on trim levels. We strongly believe that sales could be encouraging, with management targeting 1k-12k units sold a month, which we think is a reasonable target. The main selling point for the Almera is its generous space which is comparable to the C segment Altis in terms of its wheel base length. Additionally, it is also reported to have a fuel economy comparable to the Vios. The downside, however, is its performance – it has a weak power output, which stands at 139Nm of torque @ 4,000rpm, just slightly above the Mazda 2. We project annual sales to be at 9k for FY13, which may be conservative. Given that capex for this line is at RM10m, we reckon margins will be low at the initial stage due to its low localization, although should progressively improve over time.  
Upgrade FY13 earnings. While we have downgraded TCM’s FY12 numbers, its FY13 earnings have been raised, as we think the expected higher volume driven by the Almera will propel margins and its overall earnings. Firstly, we reckon that the imported kits will come in cheap from Thailand as the Almera, which has a 1.2 cc engine, is considered an eco car and has been selling very well there given its attractive pricing of THB429k (roughly RM43k), though we think that the Almera’s engine will still be imported from Japan. Estimating total sales of 9k units of Almera for FY13, we have therefore raised our revenue and earnings by 8.4% and 21% respectively. 
Upgrade to BUY. TCM is a laggard auto play which we have downgraded from BUY back in April last year when the stock was hovering around RM4.70. In view of its improving outlook, we foresee share price trending up. Since the past year and following the Japanese calamity, the stock has retraced 4.2% vs. the performance of its peers, MBM (+96.11%), DRB (+24.87%) and UMW (+43.97%). We value TCM at +1 standard deviation of 12x forward PE (mean at 10x), pegging it at FY13 EPS of 46sen to derive a new FV of RM5.52 and thus upgrading the stock to BUY.
Valuations will price in earnings growth. Our reasoning for pegging Tan Chong at 12x is simple – its earnings is forecasted to surge by 52% y-o-y in FY13.  We wish to point out that back in 2006, 1½ years before the launch of the Grand Livina which boosted its earnings by more than 4-fold in 2008, TCM’s forward PE was in the 12x-20x range. This justifies the present PE multiple of 12x pegged on its FY13 earnings.
Source: OSK

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