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.

• Key points from our meeting with management last week:

1) Targeting a return to average sales of 1.2K/month in Malaysia. This follows the average sales of 1.3K/month in 11CY18, with a notable spike following its commitment to cover the SST cost for orders before Sept 2018. We estimate it has about 30% of the backlog of 7K units left to deliver and this should support its sales for 2 months.

Beyond this, it has lined up the new Mazda 3 for May/June (coinciding with the Hari Raya period), a 2.5L turbo CX-5 in Sept and the CX-8 by year-end. We project FY19/20 sales of 13.2K/14.4K (or annual growth of 16%/10%), which is slightly below the company’s targets of 15K/16K.

2) CX-8 to lead medium-term growth. The CX-8 will take the place of the current Mazda 3 as the company’s second CKD model when the latter ceases localization soon. Recall that the CX-8’s (a 7- seater to be priced below RM200K here) closest competition is the Toyota Fortuner and Mitsubishi Outlander. Malaysia will likely receive a facelift version as the model marks its first year in Japan soon.

CX-8 hopes to achieve a 60/40 mix of domestic/exports sales, with the latter to strategically tap into the momentum that the CX-5 has built for Mazda in regional markets. Half of CX-5 production has been devoted to exports with Indonesia, Cambodia and Myanmar as rising markets, to complement the existing strength in Thailand and the Philippines.

We believe the CX-8 is essential to sharpen BAuto’s edge in the SUV segment and its strategic position between the mass-market and ultra-premium brands.

3) It will not expand for the sake of it. The plant in Kulim enjoys near full utilization on its annual capacity of 30K vehicles. Management emphasized that future expansion may need to be justified by a third CKD that would serve to grow its captive market.

It is cognizant of preserving the brand value of Mazda here by keeping to realistic sales targets and preventing excess inventory, which would warrant discounts and erode the brand over time. With our expectation of a minimal capex ahead and its massive cash pile (current net cash of RM403mil), BAuto should be able to continue its high dividend payouts. Hence, we project dividend payout ratios of 90% for FY19 to FY21 vs. FY18’s 86% (resulting in dividend yields of 8.0% to 9.4%).

• We believe BAuto continues to see support from strong domestic sales and associate earnings. The addition of new models that include a brand new CKD should augur well for its sales in the medium term.

Source: AmInvest Research - 15 Jan 2019