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Negative news to dominate automotive sector in next few months – MIDF

TheEdge Thu, Apr 30, 2020 01:11pm - 2 months ago


KUALA LUMPUR (April 30): MIDF Research has maintained its “negative” rating on the Malaysian automotive sector and said the sector is likely to be dominated by negative news flows and data sets over the next few months.

In a note, MIDF said the domestic automotive sector experienced a plunge in March sales.

It said total industry volume (TIV) contracted significantly in March to just 22,478 units, representing a 59% year-on-year (y-o-y) contraction and a 45% fall on a month-on-month basis.

MIDF said the nosedive was due to the initial impact of the movement control order (MCO) initiated on March 18.

It said key players such as Proton (-47% y-o-y), Perodua (-63% y-o-y) and Honda (-62% y-o-y) saw sales weakness across the board, with Nissan having the sharpest contraction of a 84% y-o-y fall.

MIDF said year to date, TIV totalled 106,428 units, representing a 26% contraction.

The research house expects April TIV to worsen given virtually zero sales during the month.

Previously, MIDF cut its 2020 TIV forecast to 504,580 units in view of the extended MCO and the implications for the macro outlook.

Now, it expects 2020 TIV to contract 16.5% y-o-y assuming a base case of the MCO lasting up to Phase 4 (the extension to May 12), while the sector's 2020 earnings are expected to contract by 51%.

“A post-MCO recovery is likely to be pushed out given the implication for job security, the wage outlook and consumer sentiment; consumers would have likely shifted into ‘survival mode’ now with little priority for discretionary spending,” it said.

MIDF said players like Tan Chong Motor Holdings Bhd had reportedly implemented salary cuts for employees and fee reductions for independent directors in response to slow sales.

“The absence of support schemes, e.g. scrapping programmes during the 2008/09 financial crisis, underpins our more bearish expectations relative to the 2009 downcycle,” MIDF said.

The research house highlighted that a group of association comprising the Perodua, Proton, Honda and Toyota dealers associations as well as the Federation of Motor and Credit Companies Companies Associations of Malaysia had reportedly sent in a memorandum to the Ministry of Finance.

Among the requests included were: (1) a government grant or subsidy to distributors, workshops and aftersales service vendors to weather the crisis; (2) the removal of duties until end-2020; (3) a reduction or abolishment of corporate tax for at least six months and; (4) monthly instalments for business loans to be a given a grace period and at a reduced interest rate.

MIDF said there had been no update since, but a temporary sales tax holiday similar to the one in 2018 could help temporarily lift sales and ease the cash flow crunch faced by the sector.

“When it was implemented in June to August 2018, the tax holiday drove June/July/August 2018 TIV up by some 28%/41%/27% y-o-y respectively as consumers rushed to lock in purchases to benefit from the effectively lower purchase price,” it said. “2018 TIV ended 3.8% higher and rose to close to the 600,000 mark after a two-year contraction in 2016-17.”

“Any further extension of the MCO beyond Phase 4 would translate into further downside to our forecasts (to a 2020 TIV forecast of below 500,000) and underpin our recent downgrade of the sector.”

Nonetheless, it said balance sheets are currently solid with players under coverage attaining either a net cash position (MBM Resources Bhd and Bermaz Auto Bhd) or manageable net gearing of below 40%.

MIDF said that its top "sells" are UMW Holdings Bhd (target price [TP]: RM1.60) and Tan Chong (TP: 90 sen).






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BAUTO 1.480
MBMR 3.300
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