Investment Highlights

• We maintain our BUY call on Bermaz Auto (BAuto) with a lower fair value of RM1.61 based on an unchanged FY21F PE of 13x.
• We revise our FY21–23F net profit forecasts downwards by 10%, 14% and 14% respectively after factoring in lower sales volume assumptions for the group’s domestic market.
• BAuto’s 1QFY21 core net profit of RM8.9mil missed expectations, accounting for only 6% of both ours and consensus full-year forecasts respectively. Core earnings were down 83% YoY, attributed to a slid in revenue to RM448.9mil (-16% YoY), higher finance cost and share of losses from associates.
• In 1QFY21, BAuto sold a total of 2.7K units of vehicles in the local market, a decrease of 18% YoY compared with 1QFY20’s 3.3K units. The dip in domestic sales was largely attributed to the closure of most businesses and operations in the beginning of the quarter until mid-May 2020.
• The group’s operations in the Philippines continued to be weak, recording a 1QFY21 total sales volume of only 177 units (-66% YoY). This was the Philippine’s worst quarterly sales performance in more than 5 financial years as it continues to be heavily impacted by: 1) the rising costs from the implementation of the “TRAIN” law in early 2018; and 2) the enhanced community quarantine (ECQ) where residents in the nation were required to stay at home from 17 March till 1 June 2020 due to the Covid-19 pandemic.
• BAuto’s 30%-owned MMSB flipped into a loss of RM20.0mil (-177% YoY) in 1QFY21. In the quarter, MMSB sold only 249 units vs. 3.9K units in 1QFY20. However, it was partially mitigated by Inokom’s 1QFY21 PAT of RM6.2mil (+574% YoY) despite a lower production volume of 4.3K units (-20% YoY) which led to a revenue drop at RM36.2mil (-12% YoY).
• BAuto declared a dividend of 0.5 sen/share for 1QFY21, which translates into a payout ratio of 63%. We note that the group has recently guided for a lower dividend payout of 50% of its domestic operation’s profits. For FY21F, we project a dividend yield of 4.0%.
• However, we believe that the worst is now over for BAuto. With the implementation of the SST holiday, we expect BAuto to maintain a sales and production volume of about 1.1K units/month in the next two quarters with a favourable product mix – i.e. the CX-5 CKD. Post-revision, we are still expecting a stellar growth of 35% in earnings for FY21F for the group.

Source: AmInvest Research - 11 Sept 2020