RHB Research in the recent Malaysia Sector Update report stated that February’s total insurable value of 62,649 units continued the robust momentum.
They expect March’s total insurable value to be meaningfully stronger given seasonality and it being the last month for carmakers to deliver tax-exempt orders.
RHB Research maintains an overweight call due to the potential for improved earnings and attractive yields of 4-10%. They favoured BAUTO for its growth across three marques, and 9% financial year 2024 future (Apr) yield (with a potential special dividend in quarter four financial year 2023), and UMW as a proxy for its 38%-owned associate Perodua’s strong 2023 future.
Also, February’s total insurable value came in at 62,649 units (+39% year-over-year, +27% month-over-month). Most of the marques saw month-over-month increases against a seasonally softer January.
Year-over-year, total insurable value jumped 39% mainly lifted by Perodua and Proton sales, as both national marques suffered from flood-related supply shortages in Jan and Feb 2022.
The strong year-over-year increase was also driven by strong Proton (+59%) and Perodua (+23%) unit sales, due to the aforementioned reason. Proton’s Shah Alam plant continued to operate at full capacity, while its Tanjung Malim plant ran at a 43% utilisation rate. Perodua’s plant utilisation rate stood at 89%.
Interestingly, Perodua Axia saw a 135% jump in production month-over-month while the other five Perodua models saw 2-25% month-over-month production declines, which may represent Perodua’s focus to deliver certain models before the end of March.
The large month-over-month jump in Axia’s production was also attributable to its soft Jan 2023 production (-60% month-over-month), as Perodua was likely preparing the line for the all-new second-generation Axia.
Looking ahead, RHB Research believes March’s total insurable value will be especially high, given the month has historically been very strong (as it is the fiscal year-end for many Japanese principals such as Toyota, Honda, Mazda and Daihatsu), and that March will also be the final month for carmakers to deliver sales and service tax-exempt (SST) orders.
While April’s total insurable value will likely soften month-over-month against a high base, it should nevertheless remain robust as carmakers continue to deliver on customers’ orders, which are still healthy even in the absence of the SST exemption.
With strong orders on hand and with supply chain constraints largely resolved, RHB Research thinks that the auto companies’ earnings will further improve for 2023. As input costs will likely remain steady from quarter four 2022 levels and gradually decline (with falling raw material costs and easing supply tightness), the orders should translate to deliveries and earnings.
RHB Research’s top picks are UMW and BAUTO. UMW benefits from Perodua’s expected strong 2023, and from its aerospace segment’s turnaround. It also offers a decent dividend yield of c.4%.
They still favour BAUTO for its expected growth across all three marques, as well as its potential for special dividends in quarter four financial year 2023 (Apr).
This is due to BAUTO declaring special dividends in quarter four financial year 2021 and quarter four financial year 2022 on the back of robust results. Also, BAUTO had a strong balance sheet and financial year 2023 future earnings.
Further on, management previously did not rule out potential special dividends, and RHB Research believes that a special dividend could be on the table. Key risks identified include softer-than-expected orders and deliveries, and resurgent supply chain issues.
