• Stay NEUTRAL, with new MYR2.90 TP from MYR3.64, 2% upside. UMW’s large order backlog for Toyota/Lexus and Perodua 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 those of Perodua’s. Thus, we think that a cloudy 2023, worsened by a strong USD/MYR, could continue to weigh on investor sentiment.

• Strong order backlog to boost FY22F unit sales. As the sales and service tax (SST) exemption ended in June, both Toyota/Lexus and Perodua currently face strong order backlogs. We revise our 2022 Toyota/Lexus units to 85k from 78k, and our 2022 Perodua units to 250k from 240k. Perodua currently has over 200k units in backlog orders.

• Our 2022F Perodua 250k units assumes that Perodua will not rush to fulfil orders in 2H22, and has accounted for its ongoing component shortage, as its vendors are still facing a foreign labour shortage. Besides, its vendors are likely to only provide close to 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, Perodua 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 that 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. Accounting for the above, we lower our FY23F-24F Toyota/Lexus volume to 70k-72k from 76k each, and we decrease our FY23F-24F Perodua volume to 200k-210k from 240k-242k. We have also factored in a higher USD/MYR in FY22F-24F (Figure 1). All in, we raise FY22F PAT by 4%, and lower FY23F-24F PAT by 24-20%.

• Look beyond a strong 2022. While FY22F earnings will likely be strong, we are cautious on a soft FY23F. We now peg our TP to FY23F EPS from FY22F EPS, and ascribe a lower multiple of 12x (from 13x), which is slightly below -0.5SD from its 5-year mean, to account for Perodua’s relatively dimmer prospects in FY23F and concerns of the further strengthening of the USD vs the MYR. Including a 2% ESG discount, we lower our TP to MYR2.90. Key risks include longer-than-expected supply chain disruptions and weaker-than-expected sales post tax-exemption. The converse represents the upside risks.

Source: RHB Research - 15 Jul 2022