Investment Highlights

• We maintain BUY on Bermaz Auto (BAuto) with a higher fair value (FV) of RM2.00 (from RM1.80) after rolling forward our valuation base year to CY2022 (from FY22). Our FV is based on an unchanged 13x target PE (sector average). We revise downwards FY22 earnings estimates but increase FY23–FY24 earnings.

• In a recent virtual meeting with BAuto’s management, the company revealed its 2022 product map with 20 approved new model launches in the pipeline, including facelifts. The facelifts of the Mazda 3, CX-3, CX-30, CX-8, all-new Peugeot 2008, Kia Sportage and Sorento are among the notable models (Exhibit 1). The constant product updates bode well for the company as it would translate to a more consistent and predictable sales flow. The facelift models sport new features at no extra cost, making them attractive to potential buyers. Another potential earnings rerating catalyst for the company is the local assembling of its CX-30 model which could lead to lower selling price, making it more competitive while improving the model’s margin.

• On the current chip shortage, BAuto said it affects only completely built-up (CBU) models. The company has sufficient inventory of completely knocked down (CKD) kits to weather the crisis in the near term.

• BAuto expects sales of its CKD models to increase to 90% of its total sales compared to c.80% previously while maintaining monthly average sales of 1,100–1,200 units as some consumers might shift to CKD models to avoid the longer waiting period. This could be earnings accretive to BAuto given the better CKD models' margins. Separately, the company currently has backlogged orders of 2,100 units, translating to a two-month waiting period.

• Meanwhile, BAuto’s 55%-owned Bermaz Auto Alliance is set to introduce its next model, the all-new Peugeot 2008 B-segment SUV in January 2022. Recall that the company had launched its maiden Peugeot models, the Peugeot 3008 and 5008 facelifts in early November 2021.

• We cut FY22F earnings by 15% to reflect the impact of the longer-than-expected lockdown in 1HFY22 but raise FY23F–24F earnings by 15%/40% mainly on higher sales assumption due to better visibility of its product pipeline, the extension of the SST exemption period and reopening of the economy.

Other highlights

• BAuto’s first Kia brand model, Kia Carnival, was launched in early December, priced at RM196K. The model’s CKD variant expected to be introduced in April 2022. The all-new Sportage and Sorento are expected to be launched in 2HCY22.

• Auto sales are expected to slow down after the end of the two-year SST exemption period on 30 June 2022. However, the impact would be partially offset by the recovering consumer sentiment as the economy fully reopens. We also believe that there is a possibility of BAuto temporarily absorbing the SST cost after the end of the exemption to prevent a hard landing of sales. Recall that the company implemented the measure post-2018’s tax-free window.

• BAuto is our top pick for the automobile sector. The stock is trading at an attractive valuation of 10x CY22 PE (vs. the historical average of 15x) and offers a decent 5.5% yield (CY22). The slew of new model launches will support the company’s sales flow in 2022. The new ventures in Kia and Peugeot distributorships help to extend BAUTO’s future growth runway as its Mazda’s operation reaches its full potential.

Source: AmInvest Research - 22 Dec 2021