KUALA LUMPUR (May 24): MIDF Research remains positive on the auto sector as a play into a recovery in domestic consumption.

It maintained this position on Tuesday (May 24) despite weakness seen in April 2022 where total industry volume (TIV) weakened to 56,213 units. This translated into a 3.6% year-on-year (y-o-y) contraction and 23.2% weaker compared to the record numbers registered in March 2022 given the chip supply shortage and shipment delays during the month. 

In a Tuesday report, MIDF Research said it is positive on the auto sector as prospects are underpinned by strong outstanding bookings, accommodative interest rates and, more importantly, a gradually improving employment and household income condition. 

MIDF Research’s top picks for the sector are Bermaz Auto Bhd (BAuto) ("buy"; target price [TP]: RM1.98), MBM Resources Bhd (buy; TP: RM4.05) and UMW Holdings Bhd ("buy"; TP: RM4.20). 

“Beyond the reopening theme, BAuto is a play into brand expansion from the acquisitions of the Kia and Peugeot franchises, leading to structural expansion in market share and above-industry growth. MBM Resources and UMW are both key proxies for the sector's recovery given exposure to Perodua (and Toyota for UMW) — effectively controlling the largest share of the industry. Key risks to our call are further lockdowns, a prolonged spike in inflation, a more aggressive-than-expected normalisation of interest rates and a weaker ringgit,” it noted. 

MIDF Research maintained its projection of a 13% y-o-y recovery in 2022 TIV to 575,000 units, assuming absence of any further pandemic-induced lockdowns and on the back of strong outstanding orders, notwithstanding potential short-term weakness immediately post sales and service tax (SST) holiday expiry in June 2022.

It pointed out that its 2022 TIV projection is at the lower end of the pre-pandemic range to reflect the ongoing chip shortage situation and potential intermittent supply chain disruptions.

“The MAA (Malaysian Automotive Association) has submitted an appeal to the Ministry of Finance to further extend the SST exemption period for new vehicles in light of the ongoing supply shortage situation, which has impacted the industry’s production ability to meet the extended order backlog. 

"Should this be successful, it would be an incremental positive for the auto sector, which could render further upside to projections. As an indication, an additional six-month tax holiday is estimated to raise our forecast to about 595,000-605,000 (+17% to 19% y-o-y). The potential upward revision of our projection echoes that of the MAA’s, which has indicated potential upside to its current 2022 TIV target of 600,000 (+18% y-o-y) should the tax holiday be extended,” it added. 

Meanwhile, RHB Research in a Tuesday report said while its base-case scenario still assumes that there is no extension, the government may extend the SST exemption period to help car buyers who could not take advantage of the tax holiday due to long wait times and supply chain issues. 

It added that the 15th general election may also “provide an additional impetus to extend the SST holiday”.

“We gather that the demand for cars remains strong as customers continue to place orders in hopes of qualifying for the SST holiday and/or are betting on a possible extension. Note that some customers are still placing orders knowing that they will not qualify for the SST exemption, signifying healthy underlying demand. 

“On the supply side, we opine that the component shortage will likely persist for months to come, and could worsen if more Chinese cities undergo lockdowns. Encouragingly, Proton has secured sufficient chips for production in May and June, and is rushing to fulfil orders before the end of the SST holiday,” it said. 

RHB Research maintained its 2022 TIV assumption of 580,000 and its neutral view on the sector as earnings growth could be capped by margin pressures from costlier car parts despite strong sales volumes.

The local research house favours MBM Resources for its 8% yield estimated for the financial year ending Dec 31, 2023 for the sector.