Auto sector to rebound in 2022

This is as the sector recovers from the economic downturn caused by the Covid-19 pandemic 


THE auto sector’s earnings are expected to rebound in 2022 as demand for new cars is bolstered by the sales and service tax (SST) exemption on locally-assembled (CKD) and fully imported (CBU) models. 

According to a report by AmInvestment Bank Bhd (AmInvest) on Monday, the country’s automotive industry is expected to recover from the economic downturn caused by the Covid-19 pandemic as consumers take advantage of the 100% and 50% SST exemptions for CKD and CBU cars, respectively. 

“We maintain our ‘Overweight’ recommendation on the sector with a 2022 total industry volume (TIV) forecast of 555,000 units, implying a 12% year-on-year growth. We expect TIV to continue to improve as the supply chain normalises and consumers take advantage of the SST exemption. 

“With a high vaccination rate and the number of Covid-19 cases remaining low, consumer confidence is expected to gradually improve,” the investment bank forecast. 

The bank added that there will be temporary weakness after the SST exemption ends in June but it is not a point of concern as the impact will be partially offset by the improving consumer sentiment, the deliveries of newly launched models and potentially the decision by some distributors to absorb the SST cost beyond June 30, 2022, to prevent a hard landing of sales.

The gradual easing of movement restrictions will improve businesses’ cashflows and reduce disruptions to supply chains while consumer spending on big-ticket items such as passenger vehicles remains robust in tandem with the pickup in economic activity.

“We are expecting a slew of new models to be launched in 2022 as distributors held back their model launches due to lockdowns in 2021. Among the notable new models that we expect to see in 2022 are the all-new Honda Civic, Peugeot 2008, Kia Sportage and the long-awaited all-new Perodua Alza,” the report stated. 

The TIV will also be supported by recently launched models such as the Perodua MyVi facelift and Honda City Hatchback. 

AmInvest believes Bermaz Auto Bhd (BAuto) has the most robust pipeline of new launches, with 20 models, including facelifts, set to be introduced in 2022. 

“This would contribute to a more consistent and predictable sales flow for the company.” 

The report also added that the duty exemption for electric vehicles (EVs) announced by the government in Budget 2022 is a step in the right direction to encourage EV adoption as auto firms are planning to begin introducing EV models to take advantage of the incentives, but the impact on their bottom lines is likely to be immaterial at this juncture. 

There are still challenges facing the EV subsector, such as the lack of charging infrastructure, the high maintenance cost, and low resale value associated with EVs, which are among the prohibitive factors for wider adoption among Malaysian consumers. 

The report also expects the TIV to be seasonally stronger in the fourth quarter of 2021 (4Q21) as auto players offer additional promotional discounts or cash rebates for year-end clearance, which would translate into strong earnings for auto firms in 4Q21. “We are maintaining our 2021 TIV forecast of 495,000 units,” the report noted.

According to AmInvest’s in-house projection, the benchmark Overnight Policy Rate is expected to be maintained at 1.75% at least till the first half of 2022 (1H22), with a potential first rate hike of 25 basis points in 2H22 and more likely in the 4Q22. 

The low interest rates will remain conducive for consumers to obtain vehicle financing for the purchase of new passenger cars, it opined. 

AmInvest’s sector picks are BAuto, with a fair value (FV) of RM2 per share, and UMW Holdings Bhd, with a FV of RM4.07 per share. 

BAuto is currently trading at an attractive 11.6 times price-to-earnings (PER) of calendar year 2022F earnings per share (versus its historical average of 15 times PER). Its new ventures into Peugeot and Kia distributorships provide the company with new earnings growth avenues, AmInvest opined. 

“All three of UMW’s business divisions, namely automotive, industrial, and manufacturing and engineering, are set to benefit from the reopening of the economy. We also have ‘Buy’ calls on Sime Darby Bhd (FV RM2.87) and DRB-Hicom Bhd (FV RM2.38),” AmInvest said. 

The report identified major risks for the industry include the unfavourable weakening of the ringgit against the greenback and the yen which poses the risk of margin compression for the auto companies, and a worse-than-expected chip shortage crisis due to supply chain disruption, another key risk that could derail the sector’s earnings.