MIDF Research has downgraded the automotive sector to a negative call mainly due to the multiple extensions of the Movement Control Order (MCO), weakened consumer sentiment which will lead to slower recovery, and contracted 2020 total industry volume (TIV).
Its analyst Hafriz Hezry noted that, while TIV contraction had been noted at 4% year-on-year prior to the MCO Phase Two extension, the cut to forecasts will be more significant, assuming a base case where the MCO will be extended to Phase 4.
“Assuming a base case of a further extension to a Phase 4 MCO, we slash our 2020 forecast TIV to 504,580 units from a previous 581,367 units. We now project TIV to contract by 16.5% yoy. In a worst-case scenario where the MCO is extended further to Phase 5 (i.e. till the end of May), we would expect TIV to dip below 500K at an indicative of 480,000 to 490,000,” said Hafriz.
This, he noted, will in turn impact earnings significantly, with aggregate sector earnings forecast to be 46% lower for 2020, and 26% lower in 2021, with sector earnings to contract 51% this year, despite the 18% contraction already seen in 2019.
“Sector forecast risk remains elevated given the uncertain timeline required to contain the Covid-19 outbreak and its resultant impact on the domestic macro outlook. Unlike the 2008/09 financial crisis or the 2016 sector downcycle, players are faced with compulsory closure of their operations, which means almost zero revenue during the lockdown period. A recovery upon resumption of operations could be pushed out, given possibly weakened consumer sentiment post-MCO,” said Hafriz.
Following this, he downgraded the auto stocks under its coverage, and recommended investors switch to more defensive sectors such as utilities to navigate the near-term macro headwinds.
MBM Resources Bhd and Bermaz Auto Bhd saw downgrades to neutral, with lower target prices of RM2.80 and RM1.10, from RM3.70 and RM1.40 respectively. UMW Holdings Bhd and Tan Chong Motor Holdings Bhd saw downgrades to sell, with a lower target price for UMW at RM1.60 from RM2.15 previously, and an unchanged 90 sen target price for Tan Chong.
This comes on the back of auto sector players from both the new and used car industries calling for the government to reduce taxes on vehicles, or for banks to agree to a “Buy Now Pay Later” scheme.
The MCO extension, which also allowed additional sectors to apply for a resumption of business, also saw export production lines being allowed, which earned praise as this would allow the finetuning of Occupational Safety and Health guidelines, though the industry is also calling for the government to allow the opening of showrooms. — April 13, 2020
