Investment Highlights

• We maintain our BUY call with an unchanged FV of RM2.60/share on Bermaz Auto (BAuto) based on an FY19F PE of 14x.

• We deem BAuto’s core net profit of RM124.3mil (+171%YoY) in 1HFY19 as within our expectation, making up 58% of FY19 projection as we believe the coming quarters will be slightly weaker than 2QFY19. Meanwhile, against consensus estimate, it was 62% of street number. The 2Q saw a spike in sales from “tax holiday” period and the group’s decision to absorb the SST on orders received prior to Sept.

• The unusual strength in Malaysia made up for the continuing weakness in the Philippines, where the YTD operating profit declined 66% YoY as sales tumbled due to the higher excise taxes on cars implemented from January. BAuto plans to ramp up promotions and raise the number of its dealerships (by 3 to 21 dealers by end-FY19) to regain some of the sales momentum in the Philippines.

• Malaysia sales were anchored to the CX-5 (70% of YTD sales) which sold an average of c. 870 units/month in 1H19. We note that 2QFY19 was the strongest showing for the new CX-5, which sold an average of 1,065 units/month from c. 630 units when it debuted one year ago. Of the other key models, sales of the CX-3 and M2 picked up in 2QFY19 but that of M3 dropped.

• The CX-5 also continued to be a boon by way of stronger associate (Mazda Malaysia) earnings, which rose exponentially and accounted for 14% of PBT from only 1% before. The associate sold nearly 200% more at 10.3K units for the YTD period.

• The group’s margins fell slightly on a sequential basis but were still formidable. BAuto said its sales mix and the stronger ringgit against the yen helped it improved margins in the YTD period. The stronger margins in Malaysia (up 5ppts to 12.8%) compensated for the weaker ones in the Philippines (down 4 ppts to 4.8%)

• A second interim dividend of 3.75 sen/share has been proposed. This brings the YTD total to 6.25 sen, which translates to a payout of 58% for 1HFY19. We project FY19 dividend yield to increase to 8.0% based on a payout assumption of 90% (vs. 86% for FY18).

• The group will be supported by its current backlog of about 3K units, 80% of which are orders for the CX-5. Recent launches include the Mazda 6, CX-3 and CX-9 CBU. However, we understand that Mazda sales in the last two months might dip slightly as it has to contend with the massive discounts and offers pushed by the mass-market players during this time of year.

• We reiterate the focus on BAuto to be: 1) the foundation provided by the continuing strength in sales of the CX-5; 2) a rising star in 30%-owned Mazda Malaysia (MMSB) which benefits from the manufacturing and exports of the CX-5 and the CX-8 eyed for midCY2020; 3) efforts to fortify sales with key additions on the Mazda 6, CX-3 and upcoming Mazda 3.

Source: AmInvest Research - 13 Dec 2018