Investment Highlights

• 2021 generally better. Automobile firms within our coverage reported a revenue growth of 6%, supported by the sales and service tax (SST) exemption throughout the year and wider reopening of the economy, especially in 4Q21. UMW Holdings’ sales improved the most, growing 16%, thanks to the resiliency of UMW Toyota’s supply chain in navigating through disruptions caused by the pandemic. The sector’s core net income improved 29% on the back of the stronger revenue and better operating leverage as companies are now more prudent in managing pandemic-related issues. Investment tax allowances of RM90mil and RM140mil recognized by Perodua and UMW Toyota respectively in 4Q21 (benefitting UMW Holdings and MBM Resources) also contributed to the jump in earnings.

• 4Q21 results beat expectations. The automobile sector’s results beat expectations with four (MBM Resources, UMW Holdings, Sime Darby, and Tan Chong Motor) out of the six companies under our coverage reporting stronger-than-forecasted earnings (Exhibit 2). The positive earnings surprise was predominantly driven by robust sales volume during the quarter due to pent-up demand and year-end promotions. Auto firms’ margins also improved during the quarter following better operating leverage. Meanwhile, Pecca Group and DRB-Hicom’s earnings fell short of expectations. Bermaz Auto will be announcing its 3QFY22 results in mid-March. The shortage of parts that is affecting customers’ after-sales service experience may have a long-term adverse impact on Proton’s years-long brand rehabilitation efforts and limit the carmaker from reaching its full potential. We have a HOLD call on DRB-Hicom (Exhibit 1).

• Uneven recovery; supply chain management will be the key differentiator. Our channel checks suggested that demand for passenger vehicles remains robust with distributors/carmakers having backlogged orders of 2–4 months, more than the usual 1–2 months’. Taking a cue from 2018’s tax holiday, we expect a quick rebound of sales after the SST exemption ends. Distributors/carmakers may absorb the sales tax after the tax holiday ends, trading off its margin for better sales visibility. On the supply side, we believe that the resiliency of Perodua and Toyota’s supply chain, as proven in 2021, will give the brands a competitive edge in gaining market share in 2022.

• Sector revenue and earnings are projected to grow 6% and 38% respectively in 2022 (calendarized). The higher sales projected are in tandem with the expected pick-up in consumer spending following the wider economic recovery. Meanwhile, the stronger earnings forecast is in view of an expanding margin, assuming an improvement in the sector’s operating leverage with no more lockdown-induced production disruptions moving forward. The aggregate earnings forecast for stocks under our universe of RM2,130mil implies that the sector’s earnings will recover back to the pre-pandemic level in 2022 (2019: RM2,070mil, 2020: RM1,544mil).

• We maintain our OVERWEIGHT call on the sector. Given that most companies within the sector rely on domestic demand, earnings would be relatively shielded from the impact of geopolitical conflicts. Industry sales are expected to rebound in 2022 as the supply chain normalizes and consumers’ confidence gradually recovers, underpinned by the pick-up in broadbased economic activities. Our 2022 total industry volume forecast of 555,000 units implies a 9% YoY growth. A further extension of the SST exemption would be the key upside risk to our TIV and earnings forecasts. Our top picks are Bermaz Auto (fair value RM2.00) and UMW Holdings (FV RM4.00). We also have a BUY call on MBM Resources (FV RM4.55).

• Key risks: With rising materials price and other costs of running a business increasing, carmakers are facing margin pressure. Should the trend persist, carmakers will be forced to pass the additional cost along the supply chain, affecting distributors, parts suppliers, dealers, and end consumers, changing the whole dynamics of the sector’s value chain. This could pose a downside risk to automobile firms’ margin and potentially increase in car prices, which could affect demand. The unfavourable forex trend of a weakening MYR against the USD and JPY also poses risk of margin compression for auto companies, particularly UMW Holdings (USD), Tan Chong Motor (USD) and Bermaz Auto (JPY).

Source: AmInvest Research - 10 Mar 2022