Good earnings visibility for carmakers
PETALING JAYA: Analysts generally expect the automotive sector’s earnings visibility to remain good, backed by a booking backlog of 200,000 units as of end-February 2024.

More than half of the backlog is made up of new models, indicating how appealing new models are to car buyers. The trend is likely to persist throughout 2024, given a strong line-up of new launches, said analysts.

In March, new vehicle sales or the total industry volume (TIV) came in at 71,052 units, up 13% month-on-month, driven by Hari Raya Aidilfitri promotions.

Kenanga Research said in a report: “With the three months of 2024 TIV making up 28% of our full-year projection of 710,000 units, we consider the number meeting our expectation.

“Our full-year projection is a tad lower than the 740,000 units projected by Malaysia Automotive Association.”

The research firm noted that a new car is still an affordable luxury for most Malaysian households despite the high inflation and a slowing global economy.

“This is underpinned by strong consumer confidence, supported by a stable economy and a healthy job market, and the affordability of motor vehicles underpinned by stable new car prices, thanks to the deferment of new excise duty regulations that could have resulted in prices of locally assembled vehicles increasing by 8% to 20%,” it added.

Other factors include potentially cheaper hire-purchase costs with the introduction of the reducing balance method in the calculation of interest charges and attractive new models.

Kenanga Research also believes that it will be business as usual for the affordable segment as its target customers, namely the B40 group, will be spared the impact of the impending fuel subsidy rationalisation and also could potentially benefit from the introduction of the progressive wage model.

“However, the same cannot be said for the mid-market segment as its target customers, such as the M40 group, may hold back from buying a new car or even downtrade to a smaller car to cut their fuel bills upon the introduction of fuel subsidy rationalisation,” it added.

Looking ahead, Kenanga Research expects April 2024 TIV to be lower sequentially due to the extended Hari Raya Aidilfitri holidays.

Additionally, vehicle sales will be supported by new battery electric vehicles (BEVs) that enjoy sales and service tax exemption and other EV facilities incentives up to 2025 for completely-built-up units and 2027 for completely-knocked-down units.

The research firm’s sector top pick is MBM Resources Bhd , given the group’s strong earnings visibility, backed by an order backlog of Perodua vehicles of 120,000 units (almost half of its 2024 target sales of 340,000 units).

The group is also a good proxy to the mass-market Perodua brand, as it is the largest dealer of Perodua vehicles, and its 23% stake in Perusahaan Otomobil Kedua Sdn Bhd, the producer of Perodua vehicles, as well as its attractive dividend yield of about 9%.

Meanwhile, Hong Leong Investment Bank (HLIB) Research has maintained its 2024 TIV expectation at 720,000 units versus MAA’s forecast of 740,000 units, after achieving a new record high of 799,600 units in 2023, mainly due to declining order backlogs and easing new order intakes over the coming months.

Nevertheless, there is still upside potential from exciting new model launches in late-2023 and in 2024 as well as more aggressive sales and marketing activities to sustain sales by the various original equipment manufacturers (OEMs).

“As current order backlogs soften, we expect slower sales volume in the coming quarters,” the research house said in a report.

It expects earnings for the automotive sector to dip in 2024 due to lower sales volume and higher operating costs.

“We have also noticed more aggressive new launches by Chinese OEMs with attractive pricings, which will provide stiff competition towards incumbent OEMs,” added HLIB Research.

The research house said its top “buy” picks are DRB-Hicom Bhd with a target price (TP) of RM2 and MBM Resources with a TP of RM5.40 due to their strong leverage onto the national OEMs such as Proton and Perodua, which have more sustainable sales volume and potential export growth in the long term.
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Analysts generally expect the automotive sector’s earnings visibility to remain good, backed by a booking backlog of 200,000 units as of end-February 2024.