This article first appeared in Capital, The Edge Malaysia Weekly on June 26, 2023 - July 2, 2023

Positive

MIDF RESEARCH (JUNE 21): May 2023 total industry volume (TIV) registered a strong rebound, up 22% y-o-y and 33% m-o-m at 61,795 units. This follows a weak April 2023 TIV given Raya festivities and scheduled plant closures during the month, while May 2022 was a slightly weaker month given Raya festivities that fell early in the month.

Still, May 2023 TIV remained above the 60,000 mark, driven by deliveries of strong backlog orders. Production also rebounded strongly in May, up 32% y-o-y and 58% m-o-m.

Cumulatively, for the first nine months of 2023, TIV stood at 300,978 units (+12% y-o-y) — if annualised at 722,347 units, it would be largely within our estimates, making up 101% of our 2023 forecast TIV of 713,000.

The annualised 5MCY23 TIV however, is well ahead of the Malaysian Automotive Association’s 650,000 CY23 projection and stands at the upper range of consensus estimates.

We believe May 2023 TIV levels are sustainable, given the still strong backlog of orders even almost a year after the Penjana tax holiday expiration in June 2022. We also gather that booking momentum picked up considerably in May 2023, based on input from recent management briefings: (i) Perodua saw new bookings hit about 40,000 units, which is some 53% higher than its monthly average of the first-quarter 2023 TIV of 26,200; and (ii) Mazda registered 1,800 new bookings in May, higher than pre-pandemic monthly new bookings of 1,500-1,600 units.

We keep our “positive” stance on the automotive sector given huge backlog orders, sustained new booking momentum and a supportive macro backdrop, while valuations are about 20%-40% below mean.

Bermaz Auto Bhd (BAuto) (“buy”, target price: RM3.30) is now our tactical favourite given its exposure to the weak yen while having minimal exposure to the strong US dollar. BAuto is also riding a completely knocked-down model expansion via Mazda, Kia and Peugeot, while its dividend yield of 9.7% is attractive.

We also like MBM Resources Bhd (“buy”, TP: RM4.70) for its cheap exposure to Perodua, which has a high model localisation rate with minimal foreign exchange risk and the strongest backlog bookings among the major players, stretching up to six to nine months. The dividend yield is attractive at 7.1%, backed by a strong balance sheet (net cash accounts for 14% of market capitalisation).

Despite our target price revision, UMW Holdings Bhd is still a “buy” with a TP of RM4.60, as it is a prime beneficiary of the recovery in auto demand given its dominant 52% market share via 51%-owned UMW Toyota and 38%-owned Perodua. UMW’s equipment division is a proxy for recovering business momentum, rising infrastructure projects and commodity demand, whereas aerospace is an indirect reopening play on the back of a recovery in global air travel.

Target price: RM6.20 HOLD

MAYBANK IB RESEARCH (JUNE 20): While the move to reduce stamp duty for shares should help boost retail participation, we are not overly optimistic.

We estimate stamp duty will be down by 33% for contract notes of less than RM666,667 in value. There will be no change for contracts of RM1 million and above. The move will lower transaction costs, especially for retail investors, who are sensitive to costs.

We note that the 0.1% rate is back to the pre-2022 level, while the RM1,000 cap is still five times the pre-2022 level.

Retail participation has trended downwards to 25.8% in May 2023 from a high of 43.6% in August 2020, which contributed to a record RM7.2 billion in equity average daily value (ADV) in August 2020 versus RM2 billion in May 2023.

Interest rates were low in 2020, with the overnight policy rate cut by a total of 125 basis points to 1.75% while the current OPR is 3%. Our economics team expects another 25bps hike next month.

Equity trades for 2020 (on the exchange) were also boosted by thematic plays in the glove and technology-related stocks, while global oversupply has since reversed the prospects of the glove producers and a global slowdown has daunted earnings delivery in the technology stocks.

We maintain our equity ADV forecasts of RM2.1 billion for 2023 and RM2.3 billion for 2024. Every RM0.1 billion ADV deviation from our base case impacts our FY23 estimates of net profit for Bursa Malaysia by RM9 million (4%), and by extension, our PER-based target price by 4% too, ceteris paribus.

Target price: RM5.58 ADD

CGS-CIMB RESEARCH (JUNE 22): Gamuda was awarded RM3.5 billion worth of reclamation works for Penang South Island in Malaysia, bringing its orderbook to RM21.5 billion as at April 30, 2023. The contract is for pure reclamation works, with a pretax margin guidance of 15%. It does not include infrastructure works, which may come later, according to the company. The government announced that it is committed to funding the LRT in Penang, with work expected to commence by year-end. The MRT 3 tender validity has been further extended to Sept 30 from March 31. The government appears committed to the project, according to the company, and awards could be made by year-end post-state elections.

Gamuda’s target to double its orderbook in the next two-three years (+RM12 billion per annum for FY24-FY25 forecast) remains unchanged and maintains its FY23 forecast property pre-sales target of RM4.5 billion, as it expects to convert strong bookings in 4QFY23. Reiterate “add” and target price of RM5.58. Gamuda’s share price trades at an inexpensive 13 times CY24 forecast PER and 1.1 times CY24F P/B ratio (-1 standard deviation from the 18-year mean) considering its strong growth trajectory, with no earnings void post the sale of its toll roads. A key catalyst for Gamuda’s re-rating is achieving high pre-tax margins in its Australian infrastructure projects. This happened in 3QFY23, and if accelerated, would enhance confidence in Gamuda’s project execution capabilities Down Under. Key downside risks: potential labour issues in Australia and delays in job awards.

Target price: 33 sen UNDERPERFORM

KENANGA RESEARCH (JUNE 20): MyNews disappointed again with a first-half FY23 net loss of RM9.5 million versus our full-year net profit forecast of RM6.5 million largely due to its inability to grow its top line enough to absorb higher costs and higher-than-expected depreciation charges.

We cut our FY23-FY24 net profit forecasts by 53% and 46%, respectively, to reflect higher operating expenditure and depreciation charges, and a longer gestation period for its CU stores. We still forecast a profitable FY23 against a net loss of RM22.1 million in FY22 on reduced inventory wastage and improved performance of its food production centre (FPC).

We lower our target price by 20% to 33 sen based on our FY23 forecast book value (BV) from 41 sen based on 19 times the FY24 forecast PER previously.

We like MyNews due to: (i) the under-penetrated convenience store market in Malaysia, with some 111 convenience stores per million population currently based on our estimates, compared with Thailand, Japan and Australia at 291, 445 and 268, respectively; (ii) its previously disrupted earnings growth trajectory (due to the pandemic) returned to the growth path with the improvement of its FPC and planned net addition of 50 stores in FY23; and (iii) its differentiation from competitors through South Korean products. However, we are concerned over its volatile quarterly earnings trend and a seemingly longer gestation period for its CU stores. Downgrade to “underperform” from “market perform”.

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