Investment Highlights

• Maintain NEUTRAL, with an upward bias
  
  We remain NEUTRAL on the sector but with an upward bias as two new developments have allayed our concerns. Firstly, the upcoming salary revision of the civil service will be highly beneficial for the auto sector as 1.5mil civil servants will have higher consumer purchasing power and become more bankable. Secondly, our channel checks uncovered that the lower paint quantity ordered by local car manufacturers in July was merely inventory realignment rather than any weakness in demand. We revised upwards our 2024 TIV forecast and raise our fair value for MBM Resources on these positive developments.
   
• Civil service salary hike with details out on 16 Aug 2024 to be implemented on 1 Dec 2024
  
  The Communication Minister Mr. Ahmad Fahmi bin Mohamed Fadzil gave a teaser that salaries for civil servants will be raised by 15%-43% by the end of the year. In the last salary scheme review (1 Apr 2012), salaries were raised by only 7%- 13%, therefore this much higher quantum of increase is a pleasant surprise. The final details will be out of 16 August 2024, and the new salary will be in effect in December 2024. If we apply the simple arithmetic of RM10bil/1.5mil civil servants, the average raise is RM6,666. This is a sizeable jump in the level of disposable income, and it will have a positive impact on the consumer sector.
   
• Higher salary is positive for auto loans
  
  We mentioned in our report dated 31 July that Malaysia’s auto loan book is stretched, and financiers are looking to curtail and be stricter in their future new auto loan assessments. There is no need to do so now as higher salaries automatically mean better indebtedness ratio and we believe the auto financiers will be happily approving new loan applicants. Based on our observations, the popular car models for the civil servants are Perodua and Proton. Therefore, MBM Resources (owns 20% of Perodua), Sime Darby (owns 38% of Perodua) and DRB HICOM (owns 50% of Proton) will be the key beneficiaries.
  
  To put things in perspective, RM6,666 is sufficient to pay for the yearly instalments of a 9-year term loan for Perodua Axia, Perodua Bezza, Proton Saga and Proton Iriz.

• Raise 2024 TIV to 750k from 740k prior
  
  We raise our 2024 TIV forecast to 750k, up from 740k previously. We believe Perodua and Proton will enjoy greater demand as these are the most popular brands among civil servants. The other brands are unlikely to see any meaningful improvements. This revised TIV means a YoY decline of 6% from the exceptional 2023. We maintain our 2025 TIV forecast pending MAA’s latest revision.

• Expect higher petrol price to be forthcoming
  
  The easiest and fastest way for the government to bridge the RM10bil salary increase is to raise the RON95 petrol price. Back in 2013, roughly 1.5 years after the last civil servant salary review, the government raised the petrol prices four times. By our calculation, the government will need to raise RON95 by at least RM0.72-0.80/liter (at current crude oil prices and USDMYR exchange rate) to fully offset the RM10bil in extra salary expense.

• CHANGES TO OUR RECOMMENDATIONS:
  
  ➢ MBMR: We raise our earnings forecasts by 3.0%/5.2%/3.7% on expectations that the civil servant salary review will boost car sales, especially on the affordable car segment, namely Perodua Axia and Bezza models. Our new fair value is RM5.47/share (from RM4.63/share) pegged to an unchanged FY25F P/E of 8x, 1SD above its 3-year mean. No change to our neutral 3-star ESG rating.

Source: AmInvest Research - 13 Aug 2024