PETALING JAYA: MIDF Research remains positive on the local automotive sector as a play into a recovery in domestic consumption, notwithstanding normalisation in the Overnight Policy Rate (OPR) and higher inflation.
Prospects are underpinned by strong order banks and an improving labour market & household income condition, while valuations are 25%- 40% below historical mean, it said.
Bermaz Auto Bhd (BAuto), MBM Resources Bhd and UMW Holdings Bhd remain its top sector picks.
“Beyond the reopening theme, BAuto is a play into brand expansion from the acquisition of Kia and Peugeot franchise, leading to structural expansion in market share and above-industry growth. MBM Resources and UMW are both key proxies to the sector recovery given exposure to Perodua (and Toyota for UMW) – effectively controlling the largest share of the industry.
“Additionally, auto players under our coverage (ex-Tan Chong) are sitting on strong net cash pile, which makes up 20-30% of their respective market caps – this underpins attractive dividend payouts for the year, we believe,” MIDF said in a report yesterday.
Key risks to its call are a prolonged and significant spike in inflation, deterioration in broad economic recovery and a weaker than expected ringgit.
The research house expects the automotive sector’s third quarter 2022 result seasons to be a strong quarter with a further 7.7% quarter-on-quarter growth in total industry volume (TIV) to 185,125 units (166% increase year-on-year).
“Automotive players are sitting on implied seven to 12 months waiting list. The strong order bank provides good revenue visibility for the sector moving into 2023. Furthermore, new bookings post-tax holiday has been holding up pretty well, which is around 20-30% reduction versus average monthly bookings during the tax holiday – new bookings from July 2022 onwards will likely feed into TIV from April 2023 onwards, further cementing this revenue visibility from strong forward bookings.”
However, the research house said a potential dampener could be the stronger US dollar which could impact select players such as UMW and Tan Chong Motor.
“Of the two, the former’s exposure to the US dollar is far more diluted given earnings contribution from 38%-owned Perodua (which is highly localised hence is not much impacted by forex volatility), the equipment, aerospace as well as the M&E divisions.
“We estimate UMW Toyota makes up circa 30-40% of overall group earnings. Tan Chong’s earnings however, is far more concentrated on its Nissan distribution business which relies on US dollar-denominated CKD kit/CBU imports,” MIDF said.
Year-to-date TIV is ahead of MIDF Research’s target. On a year-to-date basis, September TIV came up to 516,798 units (62% increase y-o-y), still slightly ahead of its expectation making up 85% of its 2022 forecast TIV of 607,000 (19% increase y-o-y).
Nevertheless, it added that November-December 2022 TIV could weaken as buyers opt for new year 2023 registrations. There is upside should buyers stick to their original delivery schedules.