Investment Highlights

• We are upgrading Bermaz Auto (BAuto) to BUY from HOLD with a lower FV of RM2.12/share from RM2.35/share based on a FY21F PE of 13x, which is in line with its 3-year historical average. We believe that the stock’s valuation is undemanding at this level (versus the sector average PE of 12.2x).

• We trim BAuto’s FY20–21 core net profit forecasts by 17%– 10% after factoring in more conservative sales volume assumptions for the group’s domestic market.

• Based on the MAA monthly statistics, Mazda’s sales volume of 0.8K units and 0.9K units in November and December respectively came in below our expectations of an average of 1.0K units/month.

• This was due to a one-off longer-than-expected delay of two months in the resolution of pricing issues for the CX-5 and CX-8 CKDs. Management has guided that deliveries of the CX-8 has just begun, and revenue/earnings can only be recognized in December 2019.

• We think that the worst is now behind BAuto. With the pricing approvals for its models in place, we strongly believe that the group’s sales volume will normalize to 1.0K units/month on the back of its recently launched flagship products the CX-5, CX-8 and CX-30. This should augur an impressive appraised 13% EPS growth for FY21F as the group will now be coming from a relatively low earnings base in FY20.

• Given the sharp drop in its share price, the stock now offers a superior dividend yield of 7.2% for FY21F under an assumption of a fairly conservative payout ratio of 80%. The group’s payout ratio in FY19 was 94%.

• We strongly believe that FY21F will also be backed by a guided pipeline of new launches: Mazda 2 CBU, CX-3 CBU facelift, MX-30 CBU and BT-50 CBU.

• Key highlights from meeting with BAuto’s top brass:
• 1) BAuto’s 29%-owned associate Inokom will be investing a total capex of RM200.0mil to increase the total capacity of its Kulim assembly plant from 30.0K to 80.0K units annually. BAuto’s capex portion will be circa RM20.0mil which the group plans to progressively fund throughout the project timeline of 18 months.
• 2) The capacity expansion is targeted to cater for the localization of two more models – which we suspect will be the recently launched all-new CX-30 and the upcoming MX-30. If successful, we believe that this would significantly reduce the pricing of the CX-30 due to its eligibility for EEV-customized incentives. Our channel checks have indicated that the CX-30 localization should begin in 1HCY2021 in the Kulim assembly plant.
• 3) Management guided that the MX-30 compact crossover will make its debut in the Malaysia market as a CBU in October 2020. The MX-30 will arrive as a mild-hybrid vehicle, hence our strong conviction that it would be the fourth Mazda CKD model. Any locally assembled hybrid/electric vehicle in Malaysia currently gets full excise duties exemption, which would benefit BAuto as it will cover its margins while placing the vehicle at a reasonable price point.
• We maintain our sector view that the near-term macroeconomic environment will still be challenging for foreign and premium car brands – the space where Mazda operates in – as consumers are more careful and conservative with their discretionary spending. However, we strongly believe that the stock is undervalued at current levels, providing an attractive entry and a decent upside for investors.

Source: AmInvest Research - 5 Feb 2020