Investment Highlights

• We are downgrading Bermaz Auto (BAuto) to HOLD from BUY with a lower FV of RM2.50 based on a FY20F PE of 13x. We reduce BAuto’s PE multiple to 13x from 14x as we expect the group’s Philippine operations to continue to be sluggish in the foreseeable future.

• We trim BAuto’s FY20/21/22 core net profit forecast by 15%/11%/12% after: i) factoring in a more conservative sales volume assumptions due to heightened competition in the local market’s SUV segment; and ii) a shift of consumer’s preferences towards cheaper and better value-for-money cars which has negatively impacted the premium segment.

• BAuto’s 1QFY20 core net profit of RM51.2mil was below our expectations, accounting for 19.6% and 20.6% of our and consensus forecasts respectively. Core earnings were up a marginal 2% YoY, backed by an increased revenue of RM535.0mil (+10% YoY).

• In 1QFY20, BAuto sold a total of 3.3K units of vehicles in the local market, which was a 9% YoY increase compared with 1QFY19 of 3.0K units. The improvement in domestic sales was largely attributed to the group’s promotional efforts to clear its existing CX-5 inventories, making way for the upcoming facelift model. The new CX-5 facelift is currently open for bookings, with its official launch date at the end of September.

• The group’s operations in the Philippines continued to be weak, recording a 1QFY20 total sales volume of only 0.5K (-18% QoQ, -34% YoY). This was the Philippine’s worst sales performance in more than 3 years as it continues to be heavily impacted by the rising costs from the implementation of the “TRAIN” law in early 2018. We believe that BAuto’s Philippine business will continue to struggle due to the negative impact by TRAIN and increased competition from other car marques.

• BAuto’s 30%-owned MMSB recorded a PAT of RM25.9mil (-13% QoQ, +110% YoY). The impressive YoY growth was attributed to higher CX-5 production volume for the local market arising from stronger demand. In 1QFY20, MMSB sold 3.9K units vs. 3.6K units in 1QFY19. However, Inokom registered a disappointing PAT of RM0.9mil (-71% QoQ, -56% YoY). It recorded a lower sales volume of 5.4K units (-32% QoQ, -34% YoY) which led to a decline in revenue of RM41.4mil (-34% QoQ, -30% YoY).

• BAuto declared a dividend of 3.25 sen/share for 1QFY20, which translated into a dividend yield of 1.4% and payout ratio of 75%. The group’s balance sheet remained solid with a healthy net cash position of RM188.5mil.

• New launches for FY20 include CX-3 (December), CX-5 CKD (September, now open for bookings), CX-8 (October) and CX-30 (December).

Source: AmInvest Research - 17 Sept 2019