Kenanga Research noted that earnings visibility within the industry is strong, backed by a booking backlog of 235,000 vehicles.
PETALING JAYA: Backed by robust vehicle demand and a sustained backlog of orders, the automotive sector is poised to replicate its record-breaking sales from last year.
Despite the high inflation environment and a slowing global economy, Kenanga Research believed that a new car is still an affordable luxury for most Malaysian households.
“We maintain our 2023 total industry volume (TIV) projection of 720,000 units that will match the record level achieved in 2022,” the research outfit said in a report.
It added that this aligned with the forecast of 725,000 units by the Malaysia Automotive Association.
Malaysia’s automotive TIV hit a record high of 720,658 units in 2022, breaking the previous record of 666,598 units in 2015.
Kenanga Research further attributed its optimism to the strong consumer confidence, which is supported by a stable economy and healthy job market, apart from attractive new models.
In addition, the brokerage believed the affordability of vehicles has played a significant role.
This is underpinned by stable new car prices thanks to the deferment of new excise duty regulations, which could have resulted in prices of locally assembled vehicles increasing by 8% to 20%.
Furthermore, with the introduction of a reducing balance method in the calculation of interest charges, Kenanga Research believes there is a potential for cheaper hire-purchase costs.
However, the research firm sees greater opportunities in the affordable segment as it will be less affected by the introduction of a targeted fuel subsidy.
“This is because the subsidy reform may dent the demand for mid-market vehicles as it will erode the spending power of the M40 group,” it explained.
Kenanga Research noted that earnings visibility within the industry is strong, backed by a booking backlog of 235,000 vehicles, which is unchanged from a month ago despite heavy deliveries.
According to the research house, over half of the backlogs are for new model launches and it expects to see similar trends throughout the year.
“Moreover, the recent new launches of electric vehicles such as BYD Seal and Tesla Model 3 provide additional choice in the new growth market of electric vehicles.”
For the second quarter of 2023 (2Q23), Kenanga Research observed a slight sequential improvement in earnings delivery by automotive players, with 25% of them reporting above-expectation results and 75% within expectations.
“We acknowledged that 2Q23 was seasonally soft, stemming from shorter working days and plant maintenance during the festive month,” it said.
Among the players whose results came above expectations include Bermaz Auto Bhd
(BAuto) and Sime Darby Bhd, while the rest of the auto players met expectations.
According to the research house, BAuto’s results were driven by a stronger blended margin with a product mix skewed towards high-margin models.
Meanwhile, Sime Darby’s strong local automotive operations and sustained demand for heavy equipment more than offset its automotive distribution business in China.
Kenanga Research has named MBM Resources Bhd as its top pick within the sector, citing a strong earnings visibility.
This is supported by an order backlog of 155,000 units of vehicles from its 22.58%-owned Perusahaan Otomobil Kedua Sdn Bhd, nearly half of its 2023 target sales of 314,000 units.
Additionally, the research house pointed out that MBM Resources has an attractive dividend yield of about 11%.
