• In the recently concluded earning season, the result for companies within our coverage are largely aligned with our expectations.

• We introduce our 2025F TIV forecast at 760k units which is 7% higher than our 2024F TIV of 710k units. This is on the back of the upcoming civil servant salary hikes which should boost demand for new car purchases. This is also supported by positive correlation between previous salary adjustment and TIV number.

• In addition, the implementation of RON95 subsidy rationalization could provide the upside risk to our 2025F TIV forecast, as we expect T20 shifting to EVs while the M40 and lower-income groups opting for fuel-efficient models like the Perodua Bezza and Axia.

• We upgraded our recommendation on Automotive sector to OVERWEIGHT (from NEUTRAL) as we foresee TIV numbers remain elevated in the near term. Accordingly, we have upgraded MBMR to a HOLD call (TP: RM5.50) while maintaining our BUY call on BAuto (TP: RM2.80) and SIME Darby (TP: RM3.00).

Strong Revenue Growth but Profit Challenges

The recently concluded corporate earnings season was generally positive for automotive companies, including MBM Resources Berhad (MBMR), Sime Darby Berhad (SIME), and Bermaz Auto Berhad (BAuto), with all three reporting earnings that were inline with our expectations. MBMR’s revenue grew by 5.5% YoY, driven by stronger performance in Motor Trading and Other Segments, despite a decline in Auto Parts Manufacturing. PATAMI rose 30.3% YoY, supported by higher profits from associates. Sime Darby delivered a strong top-line growth, recording a 41.4% YoY increase in revenue for 2QCY24, largely driven by higher sales in its industrial, motor divisions, as well as contributions from UMW Holdings. However, despite the impressive revenue figures, Sime Darby’s core net profit fell by 85.9% YoY, primarily due to one-off impairments, provisions of RM299mn in China, and weaker performance in Mainland China’s motor division, which faced significant pricing pressures. These challenges were somewhat mitigated by the robust earnings from the company’s operations in Malaysia and Singapore, which helped cushion the overall decline. Meanwhile, BAuto’s 2QCY24 revenue increased by 10.8% YoY, with net profit up 15.5%, driven by higher sales of Mazda models and Kia Malaysia exports. On a QoQ basis, both revenue and net profit increased, supported by stronger Mazda sales in the Philippines. However, most companies experience a decline in QoQ core profit attributed to lower vehicle sales in this quarter, due to scheduled plant shutdowns by major OEMs in April and June 2024, coinciding with public holidays in both months.

Recap on YTD TIV Performance

YTD July 2024’s Total Industry Volume (TIV) remains elevated reaching 462,088 units, a 7% increase YoY (7M2023: 430,966 units). To recap, we have adjusted our outlook for the TIV, recognizing that a return to pre-COVID levels is unlikely. Of note, we have revised our 2024F TIV forecast upwards to 710k units (1H24: 390k, 2H24F: 320k) from our earlier estimate of 650k units. This revision aligns with the recent upward adjustment of the Malaysian Automotive Association’s (MAA) target to 765k units (from 740k).

TIV to Remain Elevated on Civil Servant Salary Hike

Moving forward, we expect the upcoming salary increment for civil servants to sustain demand for automotive. Note that TIV is projected to experience gradual growth as the salary adjustments are implemented in two phases: Phase 1 on 1st Dec 2024 and Phase 2 on 1st Jan 2026. Historically, civil servant salary increments occurred twice in the past two decades: in 2007 under the administration of Tun Abdullah Badawi (that was effective from 1st July 2007), and in 2012 during Dato' Sri Najib Razak's tenure (effective from 1st Jan 2012). Chart 1 shows that TIV rose in subsequent year following the hike in civil servant salary; it rose by 7% YoY and 5% YoY in 2008 and 2012 respectively. This suggests the positive contribution from salary adjustment towards the improvement in purchasing power and TIV.

As such, we introduce our 2025F TIV forecast at 760k units, representing a projected 7% YoY increase as compared to 2024F TIV of 710k units. In addition, we think the RON95 Subsidy Rationalisation could pose additional upside risk to our TIV forecast as we anticipate that high income earners from T20 household may take this opportunity to shift from Internal Combustion Engine (ICE) vehicles to Electric Vehicles (EVs) to cut on fuel cost, while the M40 and lower-income groups may opt for more fuel-efficient vehicles, such as the Perodua Bezza and Axia.

Earnings Forecast

We upgrade MBM Resource’s 2024F/2025F/2026F earnings forecast by 21%/30%/36% to RM307mn/RM337mn/RM361mn (refer to Table 2) as we revised Perodua sale unit assumption FY24/25/26 forecast to 280k/310k/330k units from 240k/240k/240k. Given the increase in earnings, we also raised our FY24/25/26 DPS assumptions to 40/45/46sen from 31/30/30sen.

Upgrade Automotive Sector to OVERWEIGHT

We upgrade our recommendation for the sector from NEUTRAL to OVERWEIGHT driven by the positive potential of, i) the upcoming civil servant salary increment, likely boosting consumer spending, and ii) RON95 subsidy rationalisation, which is expected to shift consumer demand toward fuel-efficient and electric vehicles. However, downside risks to this outlook include the potential decline in consumer confidence, attributed to the SST hike from 6% to 8% and the introduction of the luxury tax (5%-10%). We have a BUY call on BAuto (TP: RM2.80) and SIME Darby (TP: RM3.00) while upgraded MBMR to HOLD from SELL with a higher TP of RM5.50 (from RM4.37). Our valuation is pegged at +1SD above the 5-year mean PER of 6.4x (Chart1) to FY25F EPS of 86sen.

Source: BIMB Securities Research - 9 Sept 2024