UMW And Tan Chong Large Beneficiaries From A Stronger Ringgit

The ringgit is now trading at RM4.34 against the USD, which is a significant improvement after hitting trough levels of RM4.75 in November last year. The weaker dollar came following lower US economic data which has lifted hopes that the US Federal Reserve would ease the pace of monetary policy sooner rather than later.

Key beneficiaries of a stronger Ringgit, are the auto stocks. Kenanga in its sector outlook report, identified key players under its portfolio who will be benefitting from the currency changes, UMW Holdings and Tan Chong Motor are the two largest beneficiaries of the stronger Ringgit against the USD. Both are exposed to USD-denominated import of CKD kits and CBUs – a weaker USD therefore effectively lowers import costs. Every 1% change in USD:RM os estimated to impact UMW’s FY23F earnings by 3.7% and TCM’s FY23F by 17%. TCM’s bottom line is more sensitive to USD:RM movements as our FY23F net profit is close to break-even levels.

BAuto set to reduce forex exposure. In contrast to USD:RM trends, the JPY has rebounded gradually to JPY:RM3.38 after very weak performance last year (See Chart 4). Bermaz Auto (BAuto) is mainly exposed to the JPY. This is mainly via its Mazda CBU purchases (~30% of sales), whereas finished CKDs are purchased from 30%-owned Mazda Malaysia Sdn Bhd (MMSB) in Ringgit, hence carries little forex risk.

The imminent launch of the CKD CX30 and CKD Kia models (Carnival, Sorento, Sportage) is expected to reduce the group’s forex exposure going forward. For now, every 1% change in the JPY impacts BAuto’s FY23F earnings by 0.9%.

Kenanga remains POSITIVE on autos. The stronger Ringgit trend underpins the sectors thesis for 2023, which underlines a more favorable currency environment as one of the sector’s catalysts this year. On top of this players are entering 2023 with a strong 6 to 9-month order backlog, new launches are set to reaccelerate following delays in the past year, improved macro environment – easing inflation and improved labour market to drive domestic consumption, players are sitting on large net cash piles, underpinning attractive dividends and M&A potential.

Toppicks are UMW (BUY, TP: RM5.00), BAuto (BUY, TP: RM2.67) and MBMR (BUY, TP: RM4.60).

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