Finance Ministry's SST decision lauded

By THOMAS HUONG | 22 June 2022

PETALING JAYA: Auto sales are expected to see healthy visibility over the next nine months

Despite the waiver on sales and service tax (SST) ending at the end of this month. CGS-CIMB Research said the move by the Ministry of Finance (MoF) is positive for Malaysia’s automotive sector as it will provide healthy demand visibility for the next nine months, although the research unit sees downside risks to 2023’s estimated total industry vehicle (TIV) numbers as a consequence.

The research unit said it maintained its projection of 580,000 TIV (14% higher year-on-year) for 2022, which is slightly lower than the Malaysian Automotive Association’s 2022 forecast of 600,000 units (18% higher year-on-year).

“Despite the potentially higher TIV, we still see earnings risks for the sector in view of unfavourable foreign exchange rates, and inflationary pressures from rising raw materials and labour costs,” said CGS-CIMB Research.

The research unit also pointed out that this is the government’s midpoint solution to balance the interest of consumers and the country’s tax revenue, which needs to be increased post-pandemic.

On Monday, MoF said buyers who make bookings for a new vehicle up to June 30, 2022 have until March 31, 2023 to register their vehicles at the Road Transport Department to enjoy the tax incentives.

The MoF had noted that the domestic automotive industry still faced supply chain disruptions due to the global semiconductor shortage.

According to the MoF, a total of 264,000 units of vehicles booked during the SST holiday have yet to complete installation and delivery to customers.

CGS-CIMB Research maintained its “neutral” call on the automotive sector, and said Bermaz Auto Bhd (target price: RM2.40) is its sector top pick due to its attractive 5.6% to 6.2% FY22 to FY23 (financial year ends April 30) estimated dividend yield, strong exposure to the growing sports utility vehicle (SUV) segment and expanding market share with the addition of Kia and Peugeot marques to its stable.

Meanwhile, Hong Leong Investment Bank (HLIB) Research also said the MoF’s move is positive, as it gives a fair amount of time for automakers to fulfill their current high order backlogs.

“Automakers would be able to fully benefit from the current high order backlogs without sacrificing their margins post June 2022, resulting in sustained margins until year-end,” said the research unit.

HLIB Research noted that automakers with high order backlogs include Perodua (UMW Holdings Bhd and MBM Resources Bhd), Proton (DRB-Hicom Bhd), Toyota (UMW), Honda (DRB) and Mazda (Bermaz).

The research unit also expects the industry-wide order backlogs of 264,000 units to accelerate further post the MoF decision as consumers rush to place their orders to benefit from the June 30, 2022 deadline.

READ MORE: Car showrooms brace for deluge

However, HLIB Research said after June 2022, automakers are not expected to be aggressive in their sales and marketing expenses, pending better clarity on consumer sentiment by year-end.

“We expect automakers to remain cautious in their budgets in 2023, while leveraging onto attractive new model launches to sustain their sales volume,” said the research unit.

HLIB Research maintained its “neutral” view on the automotive sector and forecast of a TIV of 600,000 units for 2022, while remaining cautious about a potential slowdown in TIV in 2023.

The research unit’s sector picks are MBM Resources (target price: RM5) and DRB (target price: RM2), as it expects national automotive brands to triumph over the longer term with potential growth from new export markets.

HLIB Research also said it likes Bermaz (target price: RM1.95) for its strong balance sheet with high order backlogs of 8,000 units for Mazda in Malaysia.

Meanwhile, Kenanga Research said it expects sustainable car sales after the SST exemption period as it believes order cancellations would be minimal, as the demand would still outweigh the supply given the massive back-logged orders accumulated since last year.

The research unit pointed out that the current backlog of 264,000 units translated into a four-to-five months delivery queue from the supply chain disruption (based on Kenanga Research’s TIV target of 600,000 units in 2022) which could also drive the back-log orders up to nine months.

“This also provides assurances to the automakers to fast-track their production level and safeguard their margin if there is a need to increase the car prices, given the increase in auto parts procurement costs (final car prices is reflected in the final invoice, not during the booking),” said Kenanga Research.

Also, new launches of electric vehicles (EVs) are expected to be boosted by various tax incentives for such cars announced under Budget 2022.

They include individual tax relief of up to RM2,500 for the purchase, installation, rental and subscription fees for EV charging facilities for two years from 2022 to 2023.

EVs will also get road tax exemption of up to 100%.

Nevertheless, Kenanga Research said for certain models, the recovery of car production could be limited by the on-going global constraint in semiconductor chips supply.

“Automakers have prioritised their usage of such resources, diverting any precious semiconductors they have to their most profitable vehicles such as full-size trucks and SUVs, as well as luxury vehicles,” said the research unit.

Kenanga Research’s sector top picks are MBM Resources and Bermaz.

The research unit noted that MBM Resources (target price: RM4.10) has a deep value stake in 22.58%-owned Perodua and dual-income streams as the largest Perodua dealer and spare parts supplier for most of the popular marques.

Kenanga Research said Bermaz (target price: RM2.30) offers one of the highest dividend yields in its automotive universe coverage and the highest net profit margin compared to peers.