KUALA LUMPUR (July 19): AmInvestment Bank has maintained its "overweight" rating of the automobile sector with an unchanged total industry volume (TIV) projection of 575,000 units.

In a report today, AmInvestment said it expects TIV growth in the second half of 2021 (2H21) to be supported by a sustained strong performance of national makes, such as Proton and Perodua, as they are priced attractively in the domestic auto market.

It noted that the sales and service tax (SST) exemption paired with the gradual reopening of economic sectors in July or August will help the industry resume operations and support TIV. Increased vaccination efforts towards herd immunity are expected to stimulate consumer spending on big-ticket items such as passenger vehicles in 2H21, while the SST exemption until year end will continue to increase vehicle sales.

On the outlook on interest rates, AmInvestment noted that the bank projects for the overnight policy rate (OPR) to remain at 1.75%, which will incentivise consumers to purchase new passenger cars and obtain vehicle financing.

The research house also noted that appreciation of the ringgit against the US dollar benefits automobile companies, such as Tan Chong Motor Holdings Bhd and UMW Holdings Bhd, as a substantial portion of their costs of goods solds are denominated in the US dollar, therefore lowering their operating cost while supporting profit margin expansion.

It added that potential downside risks which could cause a rating downgrade for the sector include a continued increase in the number of new Covid-19 cases, which could prolong the lockdown, escalating global trade tensions which could lead to depreciation of the ringgit against the US dollar, which would lead companies to hike up car prices to maintain profitability, and tightening of credit by banks for vehicle financing.

"Our top picks are MBM Resources Bhd (fair value [FV]: RM4.51/share) and DRB-Hicom Bhd (FV: RM2.38). In our view, MBM Resources is currently undervalued, trading at 6.5 times financial year ending Dec 31, 2021 forecast (FY21F) earnings per share (EPS), compared with the sector average of 14.7 times. On the other hand, DRB-Hicom is expected to continue to benefit from Proton’s sustained strong sales momentum from its X50, X70 SUVs (sport utility vehicles) and its mainstay PIES models. We continue to see bright spots in both national automakers as Proton and Perodua’s fleet of vehicles is more attractively priced with superior value propositions compared to other brands such as Nissan and Honda,” said AmInvestment Bank.