Investment Highlights

• We keep our HOLD call on Bermaz Auto (BAuto) with a lower FV of RM2.35/share based on a rolled over FY21F PE of 13x.

• We trim BAuto’s FY20/21/22 core net profit forecast by 9%/14%/11% after factoring in lower sales volume assumptions for the local (Malaysia) domestic market.

• BAuto’s 1HFY20 core net profit of RM71.8mil was below our expectations, accounting for 32.3% and 31.9% of our and consensus forecasts respectively. The group’s cumulative core earnings slid by 42% YoY with a decline of 16% YoY in revenue to RM992.2mil.

• In 1HFY20, BAuto sold a total of 5.7K units of vehicles in the local (Malaysia) market, a drop of 25% YoY compared with 1HFY19’s 7.5K units. The lower domestic sales were attributed to two main reasons: i) a delayed resolution of certain pricing issues for the new CX-5 facelift and the all-new CX-8. This led to zero CX-8 sales for the quarter; and ii) the higher base sales volume in 2018 due to the tax holidays.

• The group’s operations in the Philippines remained weak, recording a 1HFY20 sales volume of only 1.2K units (-18% YoY). However, the group registered an improved EBIT of RM9.1mil (+20% YoY) for the market. This was backed by a shift in consumer demand from lower range models like the Mazda 2 to the all-new Mazda 3 that was launched in the quarter. We believe that BAuto’s Philippine operations will continue to struggle in the near term due to the negative impact by the implementation of the TRAIN law and increased competition from other foreign car marques in the country.

• BAuto’s 30%-owned MMSB recorded a 1HFY20 top line of RM765.3mil (-18% YoY) and a PAT of RM43.9mil (-36% YoY). The decline was largely due to lower domestic sales volume and lower profit margins from added costs on the new facelift CX-5 model. Inokom also registered a discouraging 1HFY20 PAT of RM1.9mil (-71% YoY). It recorded a lower production volume of 11.9K units (-36% YoY) which led to a slid in revenue of RM74.7mil (-38% YoY) for the period.

• BAuto declared a dividend of 2.75 sen/share for the quarter, cumulating to 1HFY20 dividend of 6.0 sen/share. This translates into a net profit payout ratio of 98% for 1H20. The group’s balance sheet remained healthy with a net cash position of RM178.0mil.

• Despite the recent launches of the new CX-5 facelift, CX-8 and CX-30 in the an effort to support earnings in the coming quarter, we still see challenges ahead on BAuto’s SUV sales ahead from the more competitively priced and appealing features of Proton’s X70 and X50.

Source: AmInvest Research - 11 Dec 2019