MIDF: Malaysian auto sector set to see inflection point from 3Q20 onwards

-A +A

KUALA LUMPUR (July 2): MIDF Research has maintained its positive rating on the Malaysian automotive sector and said the sector is set to see an inflection point from 3Q20 onwards from a strong combination of tax-holiday-induced demand, robust consumer liquidity and a low interest rate environment.

In a note today, MIDF analyst Hafriz Hezry said the research house’s top sector picks are Bermaz Auto Bhd (BAuto) and UMW Holdings Bhd.

Hafriz noted Perusahaan Otomobil Kedua Sdn Bhd (Perodua) registered a strong 33% year-on-year (y-o-y) growth in June total industry volume (TIV) and almost tripled sequentially, marking an important inflection point in volume trends.

He said car prices have generally been reduced by 2% to 7% (3% to 6% for Perodua) given savings from the sales tax exemption incentive.

As a bellwether of the auto industry, this should signal the trend for sector-wide TIV to be announced later this month, Hafriz added.

“As we had highlighted in our recent sector upgrade, the three-month tax holiday in 2018 lifted TIV during the period by RM21,000 a month, relative to our conservative assumption of a RM7,800-a-month increase from the 2H20 tax-holiday.

“For the meantime, we stick to our FY20F target of 554,000 units, which represents an 8.3% y-o-y contraction,” he said.

Hafriz also noted post tax-holiday announcement, BAuto (Mazda distributor) saw an almost tripling in daily bookings versus post-movement control order (MCO) levels.

Similarly, UMW and Tan Chong Motor Holdings Bhd are seeing early signs of improvements, coupled with increased showroom traffic, he said. 

Hafriz said mirroring Perodua’s June performance, BAuto bookings ballooned to around 60 a day in the week immediately after the announcement, implying an almost doubling in daily bookings against pre-pandemic levels and a tripling against the post-MCO daily bookings.

For UMW, MIDF maintained its ‘buy’ rating at RM2.55 with an unchanged target price (TP) of RM3.40. Key catalysts include a turnaround in group earnings from 3Q20 driven mainly by the automotive division, potential launches of mass market or completely knocked down (CKD) sport utility vehicle (SUV) models and the commencement of Trent 7000 fan case assembly in 4Q20.

For BAuto, MIDF maintained its ‘buy’ rating at RM1.47 with an unchanged TP of RM1.95.

Key catalysts include a strong earnings rebound from 1QFY21 onwards, potential introduction of a third CKD model, a potential brand expansion riding on Inokom’s capacity expansion and BAuto’s solid balance sheet and potential national automotive policy (NAP) incentives to drive complete built-up (CBU) exports.

“It is difficult to ascertain if this strong trend is sustainable as we are still in the early stages of the 6.5-month long tax holiday, but these early trends are definitely very encouraging.

“Notwithstanding dented consumer sentiment given the impact of lockdown measures to contain the Covid-19 pandemic, the strong combination of tax-holiday induced demand, robust liquidity created for consumers from various stimulus measures which transfers massive amounts of cash to consumers and a low interest rate environment are strong catalysts to drive a rebound in vehicle-buying sentiment," said Hafriz. 

At 10.26am BAuto gained 2 sen or 1.36% to RM1.49, valuing it at RM1.7 billion. Meanwhile, UMW shed 1 sen or 0.39% to RM2.54 valuing it at RM2.98 billion.