National Economic Recovery Plan to bode well for auto sector — Aminvestment Bank Research
06 Jun 2020
AmInvestment Bank Research has upgraded the auto sector to “overweight” (from “neutral”) and said the cut in sales tax for motor vehicles sales announced in the government’s National Economic Recovery Plan (Penjana) will a boost for the sector.
In a note today, the research house said that it had upgraded its total industry volume (TIV) for the Malaysian auto industry by 60,000 units to 580,000 units for 2020, from the 520,000 units previously estimated. However, this new estimate is still 4% lower than 2019’s 604,000 units.
“We believe that this is a shot in the arm for local vehicle sales, similar to the three-month tax holiday during June to August in 2018. Recall that the zero-GST (goods and services tax) ‘tax holiday’ in 2018 resulted in a 6% cut in car prices across the board, significantly spurring demand for new cars with total sales of 198,500 units in that quarter (+42% quarter-on-quarter [q-o-q] and +32% year-on-year [y-o-y]).
“Our estimates show that the incremental car sales were about 20,000 cars per month (versus no tax holiday) during the three-month period. Taking our cue from this and also having considered the softer economic condition at present versus that in 2018, we forecast incremental sales of 10,000 per month over the next six months,” it said.
AmInvestment Bank Research added that it strongly believes the prices of entry-level locally assembled passenger vehicles are poised to be more attractive. As such, it believes that Proton Holdings Bhd (Proton) and Perusahaan Otomobil Kedua Sdn Bhd (Perodua) will continue to lead the way in the domestic market in 2020 due to their attractive prices and value propositions with their product fleet being locally assembled.
Based on its channel checks, the research house added that the 100% sales and service tax (SST) exemption would result in completely knocked down (CKD) car prices declining by 7% to 8%.
It said the 50% SST exemption for completely built-up (CBU) car prices is likely to result in a 3% to 4% reduction in car prices.
As such, it expects the 100% SST exemption to reduce CKD car prices by more than that of the zero-rated GST period, with a low-interest rate environment being more attractive and improving consumer sentiment towards new car purchases.
Presently, CBU and CKD passenger cars attract a 10% sales tax.
As part of its sector upgrade, AmInvestment Bank Research upgraded its fair value (FV) on MBM Resources Bhd to RM4.62 per share, from RM3.59 per share, while maintaining its “buy” call. It increased its financial year ending Dec 31, 2020 (FY20) earnings forecast by 15% to factor in higher Perodua sales.
Meanwhile, DRB-Hicom Bhd’s FV has been upgraded to RM2.49, from RM1.87 (with its “buy” call maintained), with its earnings forecast for FY20 raised by 7% to reflect better Proton and Honda sales.
Sime Darby Bhd has a higher FV of RM2.40, from RM2.21, with its FY21 earnings forecast up by 9% on higher BMW sales in Malaysia. Its “buy” call is maintained.
The research house upgraded Bermaz Auto Bhd (BAuto) to a “buy” call with an FV of RM1.79, from an “underweight” call with an FV of 82 sen. Its FY21 forecast is up by 21% to reflect higher domestic sales.
While the “hold” call on UMW Holdings Bhd is maintained, the counter’s FV is up to RM2.56, from RM1.74 per share. Its FY20 net profit forecast is up by 27% after accounting for higher Toyota and Perodua sales volumes.
Pecca Group Bhd has been upgraded to “hold”, from “underweight”, with its FV up to 76 sen, from 55 sen previously. Its FY21 net profit forecast is up by 9% following higher original equipment manufacturer (OEM) sales being anticipated.
Tan Chong Motor Holdings Bhd, while still maintained as an “underweight” call, has a higher FV of 71 sen, from 50 sen previously. Its FY20 profit forecast is up by 11% following higher expected Nissan sales in Malaysia.
APM Automotive Holdings Bhd is still a “sell”, though it now has a higher FV of RM1.37, from RM1.09. Its FY20 profit forecast is up by 9% to reflect higher sales of local auto parts.
Source: The Edge Markets