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This article first appeared in The Edge Financial Daily on March 4, 2020

Automotive sector
Maintain neutral:
The automotive sector’s total industry volume (TIV) contracted 12% year-on-year (y-o-y) on Jan 20 to 42,652 units or -22% month-on-month (m-o-m).

Though this should be largely due to a shorter working month given the Chinese New Year (CNY) festivities — CNY fell on Jan 25 this year versus Feb 5 last year — we would not rule out weakness in underlying demand playing out.

Proton and Toyota grew commendably on Jan 20, outperforming the industry’s contraction. Sequentially, Mazda recovered strongly (22% m-o-m) following a resolution of pricing issues for its CX8 and CX5 facelift models dragging Mazda’s TIV from Nov 19 to Dec 19.

For now, our forecast TIV for financial year 2020 (FY20) is maintained at a flattish 0.2% y-o-y growth.

Among key players, Proton and Perodua are expected to launch their B-segment sport utility vehicles (SUVs) this year. Honda’s City and Jazz, and Nissan’s Almera are due for replacement.

MBM Resources Bhd, with a “buy” call and target price (TP) of RM4.55, remains our top sector pick.

At just six times FY20 earnings forecasts coupled with an attractive 7% dividend yield, MBM is a cheap proxy to Perodua’s volume expansion and the spillover into its parts manufacturing and Perodua dealership units.

Key catalysts include the launch of Perodua’s new B-segment SUV in the second half of 2020 forecast, a recovery in industry production driven by new national car launches, the disposal of OMI Alloy (M) Sdn Bhd’s assets, and higher dividends from easing capital expenditure and an underleveraged balance sheet.

The risk to our call is a weaker-than-expected demand and ringgit.

Bermaz Auto Bhd (BAuto) (TP: RM2.70) remains a “buy”. Key catalysts are the launch of the CX8, facelift CX5 and CX30, a dividend outperformance, an over 50% increase in FY20 forecast export volumes driven by the CX8, potential National Automotive Policy incentives to drive exports of complete built-up units, a potential introduction of a third completely knocked down model, and a potential brand expansion riding on Inokom Corp Sdn Bhd’s enlarged capacity and BAuto’s solid balance sheet. — MIDF Research, March 3

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