Investment Highlights

• We downgrade Bermaz Auto (BAuto) to UNDERWEIGHT from BUY with a lower FV of RM1.19 (from RM2.12) based on an FY20F PE of 9x (from 13x), which is in line with our sector average of 9.2x after the recent selldown on the domestic equity market amidst macro uncertainties and a global pandemic outbreak.

• We cut our FY20–22 earnings by 22%/19%/13% after computing a lower sales volume assumptions for the group’s domestic and Philippine markets.

• BAuto’s 9MFY20 core net profit of RM100.4mil came in below ours and consensus estimates, accounting for 60% and 56% of our and consensus forecasts respectively. Core earnings were down 51% YoY, partly attributed to a slid in revenue to RM1.46bil (-25% YoY).

• In 9MFY20, BAuto sold a total of 7.9K units of vehicles in the local market, which was a 37% YoY drop compared with 9MFY19 of 12.6K units. The slump in domestic sales was largely attributed to the delay in deliveries of the new CX-5 and CX-8 models caused by the need to resolve pricing issues. We also note that BAuto heavily benefitted from the tax holiday in 9MFY19, which boosted sales volume throughout the period.

• The group’s operations in the Philippines continued to be weak, recording a 9MFY20 total sales volume of only 1.9K units (-24% YoY). This was the Philippines’ worst sales performance in more than 3 financial years as it continues to be heavily impacted by the rising costs from the implementation of the “TRAIN” law in early 2018. We expect BAuto’s Philippine business to continue to struggle due to the negative impact by TRAIN and increased competition from other car marques.

• BAuto’s 30%-owned MMSB recorded a depressed 9MFY20 PAT of RM68.8mil (-43% YoY). In 9MFY20, MMSB produced 11.7K units vs. 16.4K units in 9MFY19. Meanwhile, Inokom registered a disappointing 9MFY20 PAT of RM9.6mil (-42% YoY). It recorded lower production volume of 21.8K units (-27% YoY) which led to a decline in revenue to RM133.8mil (-33% YoY).

• BAuto declared a dividend of 1.45 sen/share for 3QFY20, cumulating to 9MFY20 dividend of 7.45 sen/share. This translated into a payout ratio of 88%. The group’s balance sheet remained sturdy with a net cash position of RM95.3mil.

• We think that amidst the current macroeconomic uncertainties, consumer discretionary spending will be massively dampened which will directly impact the purchases of big-ticket items and even more so for foreign and premium products – the space where Mazda operates in. With that, we believe that our downgrade is justified. Downgrade to UNDERWEIGHT.

Source: AmInvest Research - 17 Mar 2020