• Stay NEUTRAL, with new MYR2.75 TP from MYR3.40, 11% downside and c.7% yield. Perodua’s large order backlog of 200k units should translate to strong FY22F earnings. However, we see inflation, together with higher interest rates and car prices as factors that could dampen 2023 car sales, especially for the more mass-market marques like Perodua. Thus, a cloudy 2023 could weigh on investor sentiment. Besides, we see a lack of upside rerating catalysts.

• Strong order backlog to boost FY22F unit sales. As the sales and service tax (SST) exemption ended in June, Perodua currently faces a strong order backlog of over 200k units. We revise our 2022F Perodua units to 250k from 240k.

• Our 2022F Perodua 250k units assumes that Perodua will not rush to fulfil orders in 2H22, and has accounted for its ongoing components shortage, as its vendors are still facing a foreign labour shortage. Besides, its vendors likely can only provide for around its initially-targeted 247.8k units for the year, which we think management will maintain. In the unlikely scenario where Perodua is producing at a monthly maximum capacity of 28k units, it could clear its backlog order in just over seven months.

• Triple whammy in 2023: inflation, higher rates and car prices. We foresee numerous factors that could dampen demand for cars in 2023. Firstly, persistent and high inflation could deter discretionary big-ticket purchases, such as cars. Secondly, higher interest rates would translate into higher fixed rates on new hire purchase loans, raising the cost of financing car purchases. Banks will also likely turn more cautious and auto loan approval rates may fall. Thirdly, car prices could gradually inch up from higher input costs and from the excise duty reform, which could raise car prices by 8-20%. We think the more affordable national marques, whose customer base tends to be more price sensitive, will likely face a disproportionately larger impact. We have also factored in the potential downtrading from other marques to the more affordable national marques.

• Forecasts. Due to said factors, we lower our FY23F-24F Perodua volume to 200-210k from 240-242k. All in, we raise FY22F PAT by 9%, and lower FY23F-24F PAT by 20-15%. We highlight that weaker-than-expected FY23F Perodua sales pose downside risks to our estimate. We also update our FX assumptions, but its impact is negligible, as more than 90% of Perodua’s components are sourced locally and transacted in MYR.

• Look beyond a strong 2022. While we forecast strong earnings in FY22, we are cautious on a soft FY23. We now peg our TP to FY23F EPS from FY22F EPS, and base it on a lower multiple of 6.5x (from 7x), which is at around -0.5SD from its 5-year mean, to account for Perodua’s relatively dimmer prospects in FY23F. Including a 4% ESG discount, we lower our TP to MYR2.75. We highlight that despite the negative 2023 outlook, MBM Resources provides an attractive FY23F yield of 6.6%. Key risks include longer-than-expected supply chain disruptions and weaker-than-expected sales post tax-exemption. The converse represents the key upside risks.

Source: RHB Research - 15 Jul 2022