This article first appeared in The Edge Financial Daily on January 8, 2020

KUALA LUMPUR: Malaysia’s retail sales of motor vehicles will continue to be soft in 2020 with consumer sentiment remaining weak, said analysts.

Kenanga Research analyst Wan Mustaqim Wan Ab Aziz expects vehicles sales this year to be flat due to weak macroeconomic conditions and tepid purchasing power.

“However, this will be cushioned by all-new model launches from all the marques, such as the Proton X50, Perusahaan Otomobil Kedua Sdn Bhd’s (Perodua) new five-seater sport utility vehicle (SUV), Honda City, Nissan Almera, Toyota Vios and other new models which are due for replacement,” he told The Edge Financial Daily.

He expects vehicle sales volume of at least 600,000 units in 2019 and up slightly to 612,000 units this year — matching the Malaysian Automotive Association’s (MAA) target.

Hong Leong Investment Bank Research (HLIB Research) analyst Daniel Wong also expects total industry volume (TIV) to remain flattish at 605,000 units this year, pointing to moderating consumer sentiment.

“[This] is mainly due to overall consumer sentiment not really recovering. In addition, I think for this year (2019), not many companies are paying good bonuses. As such, consumer spending will remain cautious,” he said.

Wong also sees the sector being dragged by continued depreciation of the ringgit against the US dollar and yen in 2020, affecting mainly foreign original equipment manufacturers.

However, Affin Hwang Investment Bank Bhd analyst Brian Yeoh, who maintains a “neutral” stance on the automotive sector, has lowered his 2020 TIV projection to 590,000 units from 612,000 units previously.

“The automotive sector’s performance is expected to remain mediocre over 2020 on tepid TIV as weaker consumer sentiment weighs on purchases of big-ticket discretionary items and weaker auto margins amid a weak ringgit against the greenback and the yen,” he said in a strategy report dated Dec 11.

Fundsupermart research analyst Shawn Low Tian Hao has a more positive outlook for the sector as he expects a low interest rate environment, a tilt towards lower-engine displacement vehicles and a slew of new launches to support TIV this year to “at least match or even exceed 2019’s number”.

“As most car purchases are assisted with bank loans, the interest rate environment is important to determine consumers’ appetite. We opine that Bank Negara Malaysia may remain accommodative going into 2020 and a potential rate cut could also spur more purchases as consumers look to lock in the lower interest rate,” Low told The Edge Financial Daily.

Low also sees that Budget 2020, under which eligible Bantuan Sara Hidup recipients who own cars with a capacity of below 1.6 litres will be provided fuel subsidies, could divert consumers to favour cars with lower engine displacement. This, in turn, could potentially be a boon to domestic car brands like Perodua and Proton, which are already protected by heavy tariff barriers against foreign car brands, he added.

He is of the view that the MAA’s 2019 TIV target of 600,000 units is achievable, boosted mainly by year-end sale campaigns. Even assuming there was no growth after October’s sales number of 53,870 units, total vehicle sales in 2019 would be 604,601 units, ahead of the MAA’s forecast, he said.

The final TIV tally for 2019 has yet to be released. But in January to November, total vehicle sales slipped a marginal 0.18% to 549,445 vehicles from 550,410 vehicles in the corresponding period of the previous year.

The MAA’s annual TIV forecast of 600,000 units for 2019 would be an increase of 0.21% from 598,714 units recorded in 2018 and 4.05% higher than 576,625 units in 2017.

Top picks for sector

Affin Hwang’s Yeoh said MBM Resources Bhd (MBMR) is his preferred pick for the sector due to the stock’s valuation of six times 2020 price-earnings ratio and 5.7% dividend yield.

“MBMR’s prospects are expected to ride on continued demand for Perodua cars and reduced losses from its automotive parts manufacturing division [due to the cessation of a loss-making alloy wheel plant],” he added.

Kenanga Research’s Wan Mustaqim also likes MBMR and UMW Holdings Bhd as the two companies have exposure to Perodua — the country’s largest carmaker by volume.

Another top pick is Bermaz Auto Bhd (BAuto), mainly for its above-industry margin and average dividend yield of 8% to 9%.

“Stocks that have reached their bottoms, such as UMW and BAuto, could see further upside as per the target prices for UMW at RM5.45 and BAuto at RM2.65, with better earnings prospects for 4Q19 (fourth quarter of 2019) and FY20 (financial year 2020) from a recovery in their all-new models’ sales,” said Wan Mustaqim.

Shares in UMW closed up 10 sen or 2.24% at RM4.57 yesterday, while BAuto settled seven sen or 3.45% higher at RM2.10. Over the past year, UMW and BAuto have retreated 16.2% and 1.9% respectively.

HLIB Research’s Wong, meanwhile, likes DRB-Hicom Bhd for Proton’s turnaround story.

He also likes MBMR as it is in a net cash position of RM105.4 million with continued earnings and cash flow growth by leveraging sustained Perodua sales. “We project dividends of 18 sen (for FY19), 24 sen (FY20) and 26 sen (FY21), translating into attractive yields of 4.6% to 6.7%.”