Investment Highlights

• We are downgrading Bermaz Auto (BAuto) to UNDERWEIGHT from HOLD with a lower FV of RM0.82/share (from RM1.06) based on a 9x FY21F EPS of 9.1 sen.

• We trim BAuto’s FY20–21F core net profit forecasts by 17% and 31% respectively after factoring in more conservative sales volume assumptions for the group’s domestic market. The earnings downgrade is to reflect the movement control order (MCO) extension to 28 April 2020 (phase 3) and also a decreased appetite for premium big-ticket items post-MCO, given the economic uncertainties. We make no changes to our FY22F forecasts at this juncture.

• We have reduced our dividend payout ratio assumption to 50% of BAuto’s Malaysia operating profits from 80% of the group’s PATAMI. This will translate into a lower FY21F DPS estimate of 4.1 sen/share from 10.6 sen/share estimated earlier. Post-revision, the stock now offers a lower dividend yield of 3.1% based on the current share price.

• We recently organized a group conference call with BAuto’s management. Below are the key takeaways:

• The group plans to further utilize the group’s 29%-owned Inokom plant. BAuto is currently in negotiation for a local assembly contract job with another brand to complement the group’s Mazda CKD projects. The group highlighted that it will not be involved in the distribution of this marque. However, it will carry out the assembling and manufacturing works. It hopes to secure the contract in 2 months and commence production in the next 12 months.

• BAuto said that the group is not in a hurry to restart its Inokom production plant due to the Covid-19 pandemic. It plans to wait until the number of daily new cases to taper to a pre-MCO low before resuming operations. The group also said that it has enough inventories to last for 3-4 months when it is able to reopen showrooms and restart the dealership business.

• Business continuity wise, BAuto said that it will continue to pay salaries to all of its employees with no pay cuts and no retrenchments throughout the entire MCO period.

• The group also highlighted that the localization project of its 3rd model is on track (after the CX-5 and CX-8) and is targeted to begin production in April–May 2021. We suspect that this 3rd CKD model project will be the recently launched all-new CX-30. If successful, we believe that this will significantly reduce the pricing of the CX-30 due to the eligibility for EEV-customized incentives. Note that the full impact of the 3rd CKD model will only be reflected in the groups’ FY22 financials.

• BAuto also reiterated that the MX-30 compact crossover will also make its debut in Malaysia as a CBU at the end of 2020. The MX-30 and the CX-30 share many common parts and components. This will lead to the possibility of a 4th Mazda CKD model after the CX-30. The full impact of the MX-30 CKD on group earnings is likely to be only fully reflected from FY22F onwards. Any locally assembled hybrid/electric vehicle in Malaysia currently is entitled to full excise duties exemption. This will benefit BAuto in terms of improved profitability margins, thus placing its vehicle at a more attractive 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 will be more cautious with their discretionary spending. Downgrade to UNDERWEIGHT.

Source: AmInvest Research - 22 Apr 2020