Investment Highlights

• We maintain BUY on Bermaz Auto (BAuto) with a higher fair value (FV) of RM2.25 (from RM1.97), based on an FY23F (from CY2022F) target PE of 13x, at parity with the sector average (Exhibit 6).

• Our earnings forecasts are unchanged with BAuto expected to report sequentially stronger net earnings in 4QFY22 following higher Mazda sales volume and full quarterly contribution from the Kia and Peugeot operations.

• Our FY22F earnings imply that BAuto’s 4QFY22 core net profit of RM49mil could be 19% stronger than the previous quarter. Despite the expectation of higher sales volume YoY, 4QFY22 results may not be comparable to 4QFY21 earnings of RM67mil, which included a reversal of Covid-19-related provision (undisclosed amount).

• We expect associate contribution to be sustained at RM6.5mil, similar to RM6.6mil in 3QFY22 given the uneven recovery across ASEAN markets. The Philippine operation is likely to continue to be sluggish as the 332 units sold in 1QCY22 were still far from the pre-pandemic average of 700 units per quarter.

• Demand for the group’s products remains robust with backlogged orders crossing the 5,000-unit mark (vs. 3,800 units in March) as consumers rushed to take advantage of the sales tax exemption.

• Besides ramping up production to fully capitalise on this robust demand, we are also not ruling out the possibility of BAuto absorbing the sales tax for deliveries that will take place after the tax exemption ends. This strategy worked well for BAuto after the 2018 tax-free window ended, providing the company with sales visibility while the impact of the additional cost was offset by lower advertising and promotional spending.

• After resolving most of the quality issues it faced, sales of Peugeot models picked up with 200 units sold in March compared to prior months (February: 156 units, January: 89 units). Meanwhile, the first batch of 300 units of the fully imported Kia Carnival was fully sold in the first 3 months since its launch and BAuto is currently clearing off the second batch.

• Following the FV revision, BAuto is now our top pick for the sector. Demand for the group’s products remains robust while the constant product updates would translate to a more consistent and predictable sales flow. Local assembling of the CX-30 model is another rerating catalyst.

• Valuation-wise, the company is trading at an attractive FY23F PE of 10x vs. its 5-year historical average of 13x (Exhibit 5). The stock also offers a compelling FY23F dividend yield of 5.7%.

Other key points

• 4QFY22 sales volume is likely to be QoQ and YoY stronger. According to the Malaysian Automotive Association’s (MAA) data, a combined 2,695 units of Mazda cars were sold in the months of February (475 units) and March (2,220 units). Our fullyear FY22F sales volume of 11,880 units implies that 1,700 units will be sold in April, bringing 4QFY22 sales volume to a total of 4,400 units (+39% QoQ, +20% YoY). Given the strong sales volume reported in March and robust order book, we believe this is achievable.

• Price revision. Notably, BAuto raised the price of its Mazda CX-30 and Mazda CX-3 marginally (<1% increment) following the recent updates. The company clarified that the price increment is to reflect the additional features for the models, and not due to cost pressure. Given this trend, we could expect the upcoming Mazda CX-8 facelift’s price to be increased as well.

Source: AmInvest Research - 10 May 2022