FW: MY Automotive (POSITIVE), Pecca Group (U/G to BUY; TP: MYR1.60), ViTrox Corp (Maintain SELL; TP: MYR4.68)

 

 

Good morning,

 

We have a sector update note on Perodua's launch of Myvi, an upgrade note on Pecca and a results note on ViTrox.

 

MY Automotive (POSITIVE) –  The people's car is back!

• The all-new Perodua Myvi, a game changer. The partial unveiling of Perodua's third-generation Myvi model in the Malaysia Autoshow 2017 last weekend saw dealers racking up 5k units of pre-orders prior to yesterday's official launch in Putrajaya. Attractively priced at MYR44-53k alongside a major specification upgrade, we see upside to our Perodua volume sales forecast in 2018 notwithstanding a potential cannibalization on Perodua Bezza. For a purer and longer-term exposure to Perodua, we like MBM (BUY; TP: MYR2.75). We upgrade Pecca to BUY (TP: MYR1.60) for an immediate impact from the new Myvi being the sole supplier of leather car seat covers to Perodua.
• Will this model silence the skeptics? High expectations for Perodua's last two major model launches, Axia (Sep 2014) and Bezza (Jul 2016), were not met as interest in both models fizzled shortly after their initial honeymoon periods. As a result, Perodua and its respective supply-chain also took a hit; this raised doubts on Perodua's future launches. That said, we are excited on the new Myvi on two key aspects: (i) impressive model value as an efficient and reliable car for Malaysians (~1+m Myvi sold, representing 8% of 13.3m passenger cars on the road), and (ii) up-to-date specifications at still an attractive price to win the hearts of Malaysian consumers amid high cost of living.
• Beneficiaries of Perodua's success. MBM has the largest exposure to Perodua as a (i) shareholder (22.6%- associate stake), (ii) dealer (~10% of Perodua cars sold in Malaysia are via MBM's wholly-owned DMM Sales), and (iii) auto parts supplier (seatbelts, airbags and wheels) via Hirotako and OMI, both under MBM. Meanwhile, Pecca benefits as the sole supplier of leather car seat covers; we expect 50% of total new Myvi sales could come from the 1.5L Advance variant.

 

PECCA Group (PECCA MK; BUY; TP: MYR1.60) - FY18 growth to be backloaded

• Share price over-corrected. Weakness in 4QFY6/17 earnings saw Pecca's share price retrace by 8% in the last three months. Alongside positives from the new Myvi's launch, we expect net profit growth to resume in FY18 but caution that earnings could be backloaded due to slower production in 1QFY18, mainly from Perodua's phase out of the old Myvi. Risk-to-reward is now favourable. Stronger-than-expected take-up of the new 1.5L Advance Myvi variant will present upside to Pecca's earnings. For now, our forecasts and MYR1.60 TP are unchanged. With 18% upside, we upgrade Pecca to BUY.

 

ViTrox Corp (VITRO MK; SELL; TP: MYR4.68) - Marginally below

• Fully priced in. 9M17 core earnings were marginally below our expectation due to higher component costs. Coupled with a revision to our USD/MYR forecasts (from 4.30 to 4.15 for FY17/18 average), we trim FY17/18/19 core net profit forecasts by 2%/3%/3%. That aside, re-rating of peers prompt us to raise our PER peg for ViTrox to 22.5x FY18 PER (from 19.5x), on an unchanged 20% premium over regional peers for its leading position in the inspection equipment space. With a 16% downside potential to our revised TP of MYR4.68 (+11%), the stock remains a SELL.
• Some visible headwinds to slow down growth. Tapering book-to-bill ratio (seasonal impact) and shortage of components may end ViTrox's QoQ revenue growth streak in 4Q17. Meanwhile, a strengthening MYR against USD poses downside earnings risk to net USD exporters such as ViTrox. We now project slower earnings growth in FY18 of 20% YoY (FY17: +34% YoY) after imputing our FX Research's revised USDMYR forecasts. Our revised forecasts have considered (i) a capacity expansion into Campus 2.0, (ii) replacement cycle of the AXI equipment.
• A matter of valuation. ViTrox is currently trading at 26.8x CY18 PER (+2.5 SD) for an expected 2-year (FY17-19) earnings CAGR of 24% (share price has soared 200% YTD), well-above its peer equipment players in the region (Table 5). At this juncture, we see more risk than reward for this stock. Maintain SELL.

 

 

 

 

 

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