Investment Highlights

• 2QCY22 results outperformed expectations. Out of 5 companies under our active coverage, 2 reported above-expected results and 3 within. UMW Holdings’ (UMWH) earnings outperformed, mainly attributed to its cost-saving initiatives and price hikes, which offset the impact of a stronger USD against the MYR. Bermaz Auto’s (BAUTO) results exceeded expectations as the Mazda (Malaysia), Peugeot and Kia marques recorded higher-than-expected sales. For the 3 other companies, namely MBM Resources (MBMR), Sime Darby and Tan Chong Motors, the results meet our and consensus expectations.

• The sector’s June quarter earnings grew 59% from the previous quarter as automobile firms accelerated their deliveries, anticipating that the sales and services tax exemption will end in June this year. The sector’s earnings leapt tenfold YoY from a low base last year, which was affected by Covid-19 movement control orders. Post-2QCY22 results, the aggregate 2022 (calendarised) earnings forecasts for stocks under our universe were adjusted slightly upwards by 2% as we increase UMWH’s FY22F earnings by11% following the outperformance of the automotive division.

• The robust sales momentum is expected to continue in 3QCY22 as automakers rush to fulfil their outstanding order book. Based on our estimate, the booking queue for key marques is currently averaging at 5–6 months, depending on the models. Following the easing of chip shortages and supply chain disruptions, we also could expect less volatility in car delivery schedules. Putting this into account, we are projecting sector revenue to grow by 7% and earnings by 42% in 2022, reverting to the pre-pandemic level.

• Demand to spill into 2023. Automobile firms are still seeing a healthy daily order rate even after the end of the SST exemption period on 30 June 2022. We believe this is driven by strong underlying demand for cars as the economy recovers from pandemic-plagued years. Given the long waiting list and sturdy booking rate, car deliveries are likely to spill over beyond March 2023 and this could cushion a fall in industry sales. In addition to that, the sales volume also will be supported by the potential introduction of key volume models such as the all-new Toyota Vios, Perodua B-segment sport utility vehicle and Proton’s next Geely-based model among others. In view of this, we are forecasting that the sector’s revenue (+4% YoY) and earnings (+7% YoY) will continue to grow in 2023 albeit at a more moderate pace.

• We revise our 2022 total industry volume (TIV) forecast upwards to 625,000 units (from 610,000 units) (vs. the Malaysian Automotive Association’s 630,000 units) after imputing higher UMWH and BAUTO sales volume forecasts. The revised sales volume forecast implies a 23% YoY growth. We are also introducing the 2023 TIV forecast at 635,000 units, implying a 2% YoY growth, on the back of sustained demand.

• Our OVERWEIGHT call on the sector is premised on sustained underlying demand for cars moving forward, supported by economic growth and the persistent need for private vehicles, being Malaysians’ primary mode of transportation. Our top picks are BAUTO (fair value RM2.25) and MBMR (FV RM5.00). We also have a BUY call on UMWH (FV RM4.65).

• Key risks. Worse-than-expected increase in the cost of living that would lead to consumers cutting discretionary spending poses a downside risk to our recommendation and FVs. While the probability is low, the reintroduction of goods and services tax (GST) amid an inflationary environment would be a double whammy, setting back consumer sentiments.

Source: AmInvest Research - 6 Sept 2022