Stronger recovery path seen in automotive sector after vehicle sales tax exemption extended

Stronger recovery path seen in automotive sector after vehicle sales tax exemption extended

30 Dec 2020

Analysts foresee a stronger recovery path for the automotive sector after the government announced a six-month extension to the new vehicle sales tax exemption until June 30, 2021.

Kenanga Research’s analyst Wan Mustaqim Wan Ab Aziz upgraded the automotive sector to “overweight” from “neutral” as he envisaged stronger recovery in 2021 with total industry volume (TIV) target at 585,000 units.

He opined that the news is a positive surprise for automakers and consumers which should prompt a buying frenzy over the next few months and relieve back-logged bookings.

“We believe the new volume-driven launches in 4QCY20 (i.e. Proton X50, Honda City and Nissan Almera) could help improve consumer sentiment with back-logged bookings to overflow into 2021 and boosted by the extension of sales and services tax (SST) exemption, seasonal promotions and new launches in the 2H (second half) of the year,” he said.

Following the earnings upgrade for the SST-exempted sales extension, he now has “outperform” calls for Bermaz Auto Bhd (target price revised up to RM1.70 from RM1.40), DRB-Hicom Bhd (TP adjusted to RM2.50 from RM2.10), MBM Resources Bhd (TP raised to RM4.10 from RM3.35) and UMW Holdings Bhd (TP increased to RM3.85 from RM3.30).

TA Securities’ analyst Angeline Chin also revised her TIV for 2021 higher by 5.9% to 627,000 units.

“Accordingly, we adjust earnings of companies under our coverage higher by 2.8% to 15.7% after factoring in higher car sales assumptions. This has raised 2021 sector earnings by 5.8%,” she said.

She also upgraded automotive sector call from “neutral” to “overweight” as she believes the demand outlook has improved in 2021 with the extension of SST exemption.

“Coupled with other positive drivers such as economic recovery and the accommodative interest rate environment, the automotive industry is set to recover from Covid-19 next year,” she said.

She upgraded MBM Resources (TP revised up to RM4.08 from RM3.53) and Pecca Group Bhd (TP raised to RM1.88 from RM1.52) to “buy” due to increase in potential upside.

Affin Hwang Capital’s analyst Chow Wei Nien also lifted his 2021 estimated TIV forecast slightly to 540,000 (+9.1% year-on-year) from 520,000 previously.

However, he maintained “neutral” on the sector as he remained cognizant of the challenging macro-backdrop amidst Covid-19.

“While this positive surprise will likely provide continued support to car sales, additional demand may be more modest, in our view, considering 2020 sales has a high element of sales brought forward and a challenging macro environment still hurting discretionary consumption,” he said.

MBM Resources is his relative preference in the sector, riding on 22.6%-owned Perodua’s leadership and having a strong balance sheet to withstand any potential downturn.

PublicInvest Research’s analyst Nur Farah Syifaa’ Mohamad Fu’ad also maintained her “neutral” view on the sector.

“We are positive on the development, as this should help to spur vehicle sales demand owing to a reduction in car prices. Nevertheless, we expect consumer sentiment to remain weak due to an uncertain economic environment that may curb spending on big-ticket items,” she said.

She also believes valuations on auto stocks have already priced in the positive development.

“Auto sector is currently trading at 20 times forward price to earnings ratio (PER), compared to five-year average PER of 14 times. Hence, valuations appear unattractive, in our view,” she added.

Source: The Edge Markets