• Top Picks: Bermaz Auto and Sime Darby. In this 4Q22 strategy report, we highlight that while a strengthening USD/MYR poses margin compression risks to UMW, its FX sensitivity shows a limited impact, which may be due to its natural hedging within UMW Group. Meanwhile, Bermaz Auto is a beneficiary of the weakening JPY/MYR, but its potential earnings accretion is also capped due to limited CBU imports. Despite expectations of strong sector earnings in 2H22, we remain NEUTRAL on the sector on a cautious outlook for 2023 sales, due to macroeconomic headwinds.

• Mixed supply chain situation. We gathered from industry executives and salespeople that supply chain issues have eased significantly. Most marques have secured sufficient chip supplies, but some are still facing component shortages. Of the companies under our coverage, Bermaz Auto and Tan Chong Motor are the only ones still grappling with semiconductor shortages. Most other marques, including the national ones, are no longer facing severe parts shortages. Perodua's strong September sales (24,626 units) suggest that the labour shortages at its component vendors have largely been resolved. Certain European marques, on the other hand, are still lacking wire harnesses, speakers, head lamps and some sensors.

• UMW has a natural hedge (within its group) against the strengthening USD/MYR. While a 1 sen increase in the USD/MYR rate may result in a MYR4-5m PBT loss to UMW Toyota (UMWT) – which contributes 40-50% to group PBT, a 10% increase in the USD/MYR rate would only reduce group earnings by MYR0.97m. The impact to the group is relatively smaller because its equipment and aerospace divisions benefit from a strengthening USD, while Perodua (40-60% of PBT) provides a further cushion with >90% local content, reducing FX impact. Due to the said natural hedge within the group, our analysis shows that the impact of a higher USD on its FY22-24F earnings should be less than -1%.

• Bermaz Auto's impact from a weakening JPY is also limited, as guided by management. It would mainly benefit from the weakening JPY via its import of CBU units – which we estimate should make up <30% of its Mazda sales in FY23F (22% in FY22). According to its FY22 annual report, a 5% weakening of the JPY/MYR rate would have boosted its net profit by only MYR0.8m, which made up an insignificant 0.5% of FY22 net earnings.

• Sector weighting still NEUTRAL. Despite expectations of strong earnings for 3Q22 and 4Q22, we maintain our NEUTRAL sector weighting – premised on a cautious 2023, which could pressure investor sentiment. Amidst continued market uncertainty, we continue to like Bermaz Auto and Sime Darby for their 7% and 6% yields. Their lack of exposure to national marques should also help them navigate through the macroeconomic headwinds. Bermaz Auto should also benefit from the continued growth of the Kia and Peugeot brands, while Sime Darby's wide fleet of EV offerings positions it to capture the growth of EV adoption in the region. Sime Darby’s performance is also supported by its Australasia industrial segment, as its mining equipment services should continue to benefit from elevated metallurgical coal prices (c.USD290/tonne). Key downside risks include worsening component shortages, a further weakening of the MYR, and worse-than-expected macroeconomic headwinds, which may further soften orders. The reverse of these conditions would present upside risks.

Source: RHB Research - 20 Oct 2022