• Top Pick: Bermaz Auto (BAUTO). 1Q24 results largely disappointed, with two counters under our coverage posting results below expectations, one inline, and one above expectations. Despite the strong YTD-May TIV, we continue to anticipate 2024 having a meaningful decline in TIV, likely to be seen in the 2H, given the lack of catalysts to bring it to another high. We maintain our NEUTRAL call on the sector.

• 1Q24 results largely disappointed. Generally, the auto sector performance missed expectations as both Sime Darby and Tan Chong Motor fell short of our expectations while MBM Resources beat expectations. BAUTO’s FY24 results on the other hand were in line. Post acquisition of UMW, SIME’s earnings were dragged by higher-than-expected interest costs on top of weaker-than-expected associates’ contributions, while TCM started off FY24 with continuing losses. MBM’s earnings outperformed expectations, thanks to stronger Perodua sales during the quarter, up 9% YoY. BAUTO closed its FY24 books with another year of record high earnings, thanks to its solid Mazda sales volumes (+18% YoY). As anticipated, BAUTO declared special DPS of 7 sen on top of its 4QFY24 DPS of 4.75 sen, bringing its FY24 DPS to 26 sen (FY24 payout ratio: 86%).

• Receding backlogs continue. Major marques such as Perodua and Toyota have seen declines in their order backlogs, from 128k and 28k in end-Dec 2023 to 100k and 20k currently. Perodua is eyeing for sales volume of 330k units this year, comparable to last year’s 330,325 units. Considering that Perodua has achieved volume growth of 20% YoY YTD, we believe the target is achievable. We have revised up our 2024 Perodua sales assumption accordingly to 330k units from 250k units previously.

• Outlook. We foresee a seasonally weaker 2Q24 TIV QoQ, due to the shorter working quarter given the Aidilfitri festive period as well as other public holidays observed. YoY, we believe 2Q24 will post stronger sales volumes due to the low base while Perodua (which makes up more than 40% of YTD TIV) charted outstanding growth in May at 20% YoY, bringing May TIV to +8% YoY YTD. Post 1Q24 results, we revised up our 2024 TIV forecast to 740k units (from 625k units), mainly due to revision of Perodua’s FY24 forecasted volumes on the back of stronger-than-expected sales. Regardless, we keep our view that the sector is seeing a cyclical downturn for sales volumes after two record-breaking years. Hence, we anticipate a meaningful TIV decline in 2H24 as backlogs continue to taper off while sales normalise.

• We retain our sector call, premised on a weaker TIV performance as normalisation of sales volumes takes place, likely in 2H24. BAUTO remains our Top Pick, as we still like its c.9% dividend yield and believe its car sales should remain resilient vs that of other marques.

• Key downside risks include softer-than-expected orders and deliveries, as well as resurgent supply chain issues. The opposite represents upside risks.

Source: RHB Securities Research - 2 Jul 2024