This article first appeared in Capital, The Edge Malaysia Weekly on August 7, 2023 - August 13, 2023

(Market weight)

UOB Kay Hian (July 31): The total industry volume (TIV) for 6M23 continued to be strong, backed by higher backlog orders. Despite the sector outperforming the FBM KLCI by 13.5%, we maintain “market weight” as we see base normalisation in the absence of major catalysts. The long-term outlook remains positive with the continuous launch of new models, such as electric vehicles (EVs).

1H23 was positively affected by the fulfilment of substantial orders that were factored into TIV due to rushed deliveries caused by the Sales and Service Tax (SST) exemption, which ended in March. TIV grew 10.4% year on year (y-o-y) in 1H23. This can be attributed to the national car brands, which improved by 19% y-o-y due to robust demand and a backlog of orders from the A and B segments. In contrast, the volume of non-national brands dropped by 5% y-o-y but some brands still recorded robust order books, namely Toyota (50,000 units) and Mazda (5,000 units) year to date.

Moving into 2H23, we expect TIV to decline 7% y-o-y in 2023 after increasing our TIV estimate to 670,000 units (from 630,000 units). Note that backlog orders have continued to see a healthy booking order volume. However, we prefer to remain conservative at this juncture, expecting a downturn in sales volume from a high base post-SST exemption.

The newly launched EV marques, such as Tesla, BYD, Neta and GWM, with prices ranging from RM100,000 to RM200,000, could impact the upfront demand for normal ICE (internal combustion engine) vehicles. However, the contribution of EV numbers to market share is still insignificant, accounting for 0.3% (2,631 units) in 2022. We assume this could grow to 0.7% in 2023, backed by the current positive momentum.

The automobile sector is currently trading at a 2023F PER of 12 times, which is slightly lower than the sector’s historical average (five-year mean) of 14.3 times and above -1SD (standard deviation) of eight times. Although we believe there is upside potential in sector valuation, we remain cautious. We expect sector revenue and earnings to decline by 10% and 3% respectively. Nevertheless, the stronger-than-expected consumer demand and optimism of an economic recovery in 4Q23 could lead to a rerating in the sector.

Target price: RM4.95 BUY

CLSA (July 31): Over the past few days, Sydney Metro West (SMW) made headlines when New South Wales’ Premier Chris Minns did not guarantee that SMW would continue amid the Sydney Metro’s ongoing independent review. Involving Gamuda’s largest construction job (22% of its order book), our view is that SMW will proceed, and the new state government wants to ensure it gets its money’s worth. We maintain our “buy” rating and target price of RM4.95.

The SMW connects the two biggest employment centres and only transports people who live in six suburbs. Gamuda’s A$2.16 billion job was already 27% completed in April. Channel checks indicate one (of two) tunnel boring machines has started work on its 9km portion, meant to be completed by 2026.

We value Gamuda at an SOTP-based target price of RM4.95, on 15 times construction earnings and a 40% discount to the RNAV for property. We value Gamuda’s construction division based on 13.5 times sustainable earnings and apply 12 times sustainable earnings for its local property project, with a 40% discount. We use DCF to value its expressway and water supply operations and maintenance concessions. Our target price for the stock is based on an estimated fully diluted RNAV per share.

Target price: RM7.50 BUY

MIDF Research (Aug 1): Bursa Malaysia’s better 2QFY23 earnings growth, coming in at +28.3% y-o-y (versus 1QFY23’s -17.4% y-o-y), is in line with expectations. 1HFY23 earnings came in +3.9% y-o-y higher. This was within our and consensus’ expectations, coming in at 53.7% of our and 56.4% of their full-year estimates respectively. The earnings growth in 2QFY23 was due to a reversal in provisions for SST on digital services of RM27.7 million.

Total revenue in 2QFY23 fell 4.8% y-o-y, dragged down by securities trading revenue which declined at a lower pace of 10.5% y-o-y to RM85 million (versus 1QFY23’s -15.3% y-o-y). As such, 1HFY23 trading revenue declined 11.5% y-o-y.

We opine that the weakness in trading activity continued in 2QFY23 due to volatility in global markets. This may have led to or exacerbated the normalisation of retail trade. However, we expect that the US interest rate hike pause by the Federal Reserve will improve sentiment and market valuations going forward. Therefore, we are maintaining our “buy” call on the stock. We roll over our valuation to FY24, resulting in a revised target price of RM7.50 (previously RM7.30), pegging our FY24 EPS to a PER of 23 times.

Target price: RM1.01 BUY

Maybank Investment Bank Research (Aug 1): FY23 core net profit was slightly below expectations, at 96%/97% of our and consensus’ estimates. The discrepancy was mainly due to higher-than-expected finance costs.

We lower our net profit forecast by 4% per annum and our revised rolled-forward DDM target price to RM1.01 (from RM1.03). YTL REIT’s investment thesis is premised on resilient earnings from all of its Malaysian and Japanese assets under the master lease structure and earnings upside potential from its Australian hotels. The trust offers a favourable CY24E net yield of 8.7%, the highest in our Malaysian REIT universe (average: 6.2%).

Excluding one-off gains of RM55.7 million, 4QFY23 core net profit was RM27.9 million (-24% y-o-y, -25% quarter on quarter), bringing FY23 core earnings to RM139.5 million (+1% y-o-y). Y-o-y, 4QFY23 revenue (+10%) and net property income (6%) were lifted by improvement at the Australian hotels, where average occupancy stood at 73.2% (4QFY22: 62.5%) and average daily rate improved by 1.5% y-o-y. However, 4QFY23 earnings were partly dragged down by higher finance costs (+68% y-o-y, +8% q-o-q) due to higher interest rates on its Australian borrowings at 5.7%. 

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