KUALA LUMPUR (June 21): Kenanga Research has upgraded the automotive sector call to "overweight" (from "neutral") following the re-opening of economic activities, and further driven by buoyant recovery in car sales as evident from the growing number of back-logged bookings for popular models (up to six months), with stream of new higher-margin models launched in 2022 (including models that were postponed from 2021).

In a note on Tuesday (June 21), the research house said that positively, it expects sustainable car sales post-SST exemption period as order cancellations would be minimal as the demand would still outweigh the supply given the massive back-logged orders accumulated since last year coupled with the government commitment to absorb the SST for orders before June 30, 2022, with JPJ registration before March 31, 2023.

“Our 2022 total industry volume (TIV) target at 600,000 units (+18%) is in line with the MAA’s 2022 TIV target.

“The sector is currently trading at trailing 12x PER which is at a 25% discount to pre-pandemic mean of 16x PER.

“We expect profits in subsequent quarters to gradually normalise to pre-pandemic levels on the back of sector earnings growth of 22% in FY23 which should justify sector PER to gradually reverting closer to the mean,” it said.

Kenanga said it prefers players with industry leading market position, and sustainable high-margin profit models.

“We like MBM Resources Bhd (OP; TP: RM4.10) given their market leading position in the national marques space.

“We believe the player that benefits most from high-margin new launches is Bermaz Auto Bhd (OP; TP: RM2.30) given that it’s just added two new marques under its stable (Kia and Peugeot) with 18 new models including Mazda starting 4QCY21 until 2023,” it said.