SINGAPORE (Mar 6): MeGroup, the Catalist-listed car component supplier and car dealership, is proxy to 70% of Malaysia’s auto market, says CGS-CIMB Research.
Listed on SGX Catalist last October, some of its major clients include Perodua, Proton and Johnson Controls-Hitachi. It also owns and operates 3S and 4S automobile dealerships under the Honda, Mazda and Peugeot brands.
Recently, the group also received its third Peugeot dealership and has more in the pipeline.
"These brands represent about 70% of auto exposure in Malaysia, based in new vehicle sales in 2018," says analyst Ngoh Yi Sin in an unrated Tuesday report.
Meanwhile, the group seeks to secure more brand partnerships and sites, following the successful award of its second dealership from Honda in less than a year after their initial partnership started.
However, Ngoh warns that the group’s dealership segment operates in the cyclical auto industry and has to bear upfront capex for new sites. These are then mitigated by “fairly defensive” aftersales services and positive operating cashflow.
Still, management believes that further dealership acquisitions can be supported by its 0.3 times net gearing as of end Sept 2018, adds Ngoh.
As for the group’s manufacturing division, new heating, ventilation and air-conditioning (HVAC) orders from Johnson Controls-Hitachi are expected to contribute sales in FY19F onwards, with potential tailwinds from the third National Car project and National Automotive Policy changes, according to the group.
“MeGroup’s manufacturing business provides a stable income stream, given the 3- to 5-year product lifecycle, and attractive 30-40% gross margins,” says Ngoh.
Other growth areas include diversification into the reconditioned and used car industry.
From FY16 to FY18, MeGroup experienced earnings volatility due to a fire incident in FY17 and compulsory land acquisition by local authorities in FY18. But 1H19 saw a 190% y-o-y increase in sales due to zero GST in Jun-Aug 2018.
“While such strong sales performance is unlikely to repeat going forward, management believes the launch of new car models will support industry volume growth,” says Ngoh.
As at 12 noon, shares in MeGroup are trading at 20 cents.
