Investment Highlights

• We maintain BUY on Bermaz Auto (BAuto) with an unchanged fair value (FV) of RM2.25/share, based on an FY23F target PE of 13x, in line with the sector average.

• We make no changes in our earnings estimate as BAuto’s 1QFY23 net earnings of RM50mil (-36% QoQ, 3.9x YoY) were largely in line with our expectation. The core net profit accounted for 25% of our forecast and 28% of consensus, compared to historical 1Q which contributed 19%–35% of full-year earnings in FY17–19.

• The sequentially lower revenue of RM717mil (-20% QoQ, +1.2x YoY) was expected following the softer car sales volume (Exhibits 2–5). The lower deliveries were mainly attributed to supply chain disruptions caused by China lockdowns that led to an inventory shortage of Mazda models. Nevertheless, the situation is expected to gradually recover as the supply chain readjusts.

• Meanwhile, the Philippine operations reported a stronger operating profit of RM7mil (vs. RM2mil in 4QFY22), backed by stronger sales. Nevertheless, as this was also affected by the inventory shortage, associate contribution declined by 58% to RM4mil, due to lower contributions from Mazda Malaysia and Inokom Corporation.

• YoY, the group’s earnings improved by 3.9x compared to a low base in 1QFY22, which was affected by the movement control order. Separately, the group declared an interim dividend of 3.0 sen/share (70% payout based on 1QFY23 EPS), broadly in line with our expectation.

• BAuto’s outstanding order book rose doubled QoQ to 11.9K units – i) Mazda 10K units; ii) Kia 1.3K units; and iii) Peugeot 600 units – as of mid-August. This is sufficient to fuel its sales at least for the next 6–7 months.

• In addition, the group’s booking rate remains healthy postSST exemption period, clocking 900 orders in July vs. 1,100–1,200 during a normal period. This is mainly attributed to BAuto’s exercise of absorbing 50% of the SST hike for new bookings starting July until December 2022. The strong order book will provide BAuto with sales visibility while the impact of the additional cost could be offset by lower advertising and promotional spending.

• Another key earnings rerating catalyst for the company is the introduction of the locally assembled CX-30, in our view. With the production line currently being set up at the Inokom plant, the completely knocked down (CKD) programme is set to materialise soon.

• With the strong sales visibility and earnings catalysts still intact, the company is trading at an undemanding FY23F PE of 10.6x vs. its 5-year historical average of 13x (Exhibit 7).

Source: AmInvest Research - 13 Sept 2022