Annual TIV could hit record high in 2022 on sustained delivery momentum, say analysts
20 Oct 2022
Annual total industry volume (TIV) could hit a record high in 2022, with analysts expecting another quarter of stellar earnings from automotive companies on sustained delivery momentum.
The number of cars sold in September jumped by more than a third or 34.63% to 67,659 from 44,227 a year earlier as automotive companies continued to fulfil many of the bookings received prior to June 30, the Malaysian Automotive Association (MAA) said on Tuesday (Oct 18).
Year to date, the sales volume up to end-September was 62% higher than the corresponding period in 2021.
In a note on Thursday, AmInvestment Bank analyst Muhammad Afif Zulkaplly said the automotive sector’s earnings are expected to remain resilient in the third quarter of the year (3QCY2022), underpinned by robust sales volume.
“With the view that there will not be any significant change in automobile firms’ cost structure, we expect the stronger 3QCY2022 TIV of 185,125 units to translate into sequential improvement in the sector earnings.
“We do not rule out the possibility of margin expansions on the back of better operating leverage from higher production levels,” he said.
Muhammad Afif also made no changes to his 2022 forecast TIV of 600,000 units which assumes industry sales would normalise back to pre-pandemic levels following the absence of the sales and service tax (SST) exemption, which expired on June 30 this year.
However, he does not expect a sharp decline in sales as automobile firms are still registering a healthy daily order rate even after the end of the SST exemption period.
Given the long waiting list and resilient booking rate, he said car deliveries are likely to spill over beyond March 2023 and this could cushion a fall in industry sales.
“Distributors or automakers’ decision to delay their new launches also bodes well as it would help provide an additional boost to sales next year,” he said.
Muhammad Afif, meanwhile, said an abrupt shift in consumer sentiment due to recessionary fears will be the key downside risk to his recommendation and earnings forecasts, and the impact could be compounded by sustained widespread inflation and rising interest rates.
“The further weakening of the ringgit against the US dollar also might affect UMW Holdings Bhd and Tan Chong Motor Holdings Bhd’s gross margin,” he added.
AmInvestment retained its ‘overweight’ recommendation on the automotive sector, due to the sturdy underlying demand for cars moving forward, supported by economic growth and the persistent need for private vehicles, being Malaysians’ primary mode of transportation, he said.
Kenanga Research analyst Wan Mustaqim Wan Ab Aziz also maintained an ‘overweight’ call on the sector with his 2022 TIV target of 650,000 units and 2023 TIV target of 660,000 units compared to MAA’s target of 630,000 units for 2022 and 636,000 units for 2023.
To ensure consumers keep coming back to their showrooms, he said automakers are putting onto the market newer models that also command better margins.
“Currently, vehicle order backlogs are reaching the tune of some 350,000 units. Not all of these, particularly new models with a waiting period of beyond 12 months, will be delivered and registered before end-March 2023 to enjoy the SST exemption. This means TIV will not fall off the cliff after March 2023.
“Additionally, there will be launches of new battery electric vehicles (BEVs) that will still enjoy SST exemption and other EV facilities incentives up to 2024 for complete built-up (CBU) and 2025 for completely knocked-down (CKD), underpinning the TIV,” he said in a note.
Bermaz Auto, MBM Resources are top picks by analysts
Hong Leong Investment Bank Research (HLIB Research) analyst Daniel Wong expects an upside to his TIV forecast of 600,000 units for 2022, as he expects continued high order deliveries in coming months as original equipment manufacturers (OEMs) accelerate production and imports to fulfil the huge order backlogs and reduce the waiting period.
“We believe current order backlogs for industry remain strong at over 300,000 units. Despite the expected strong TIV recovery until year end, we still maintain our ‘neutral’ rating on the sector, as we expect TIV to slow down in 2023,” he said.
Wong also advised investors to accumulate stocks in MBM Resources Bhd (“buy” call with a target price of RM5) and DRB-Hicom Bhd (“buy” call with a TP of RM2.06) as he expects the national OEMs to triumph over the longer term with potential growth from new export markets.
He also likes Bermaz Auto Bhd (“buy” call with a TP of RM2.05) for its strong balance sheet with high order backlogs lasting for more than six months.
Similarly, Kenanga’s top picks for the sector are MBM Resources (“outperform” with a TP of RM4.30) and Bermaz Auto (“outperform” with a TP of RM2.30), with the firm liking MBM Resources for its strategy to focus on affordably priced Perodua vehicles amidst the high inflationary environment with more than 200,000 units of booking backlogs.
This is in addition to the highly sought-after Tier-1 OEM auto parts manufacturing line, and position in capitalising on both fronts for Perodua through its 22.58% stake and role as the largest Perodua dealership.
On the other hand, Kenanga likes Bermaz Auto for its premium mid-market Mazda brand that offers the best of both worlds, that is targeting the mass middle-income group and yet commanding better margins than its peers in the mid-market segment, as well as its attractive dividend yield of 5%.
AmInvestment’s top picks are Bermaz Auto (“buy” call with a fair value of RM2.25) and MBM Resources (“buy” call with an FV of RM5) given their high sales visibility and product updates, which have garnered encouraging customer receptions.
Source: The Edge Markets