Investment Highlights

• We maintain BUY on Bermaz Auto with an unchanged fair value of RM3.42/share, based on FY24F PE of 12x at parity with its 5-year mean.

• No changes to our earnings forecast after an engagement session with management recently.

• We expect Bermaz Auto’s FY25F earnings to be largely sustained by a strong pipeline of new launches (CX-60, Kia Caren and the all-new Sportage) coupled with strategic focus on higher-margin models (Mazda CX-9, CX-8 and CX-5).

• The introduction of more new models to the Malaysian market will be facilitated by Bermaz Auto’s good relationship with its Japanese counterpart. In the coming quarter, due to Mazda’s higher CKD deliveries, the ratio of CKD models is expected to grow to 85% and 15% for CBU (CKD:CBU ratio was 80:20 in 1QFY24).

• The group strongly believes that FY24F sales target of 20k units is achievable with the main contribution anticipated from Mazda CX-5 and CX-30 models, making up over 55- 60% of sales. This is supported by the normalisation of supply chains during the year.

• On 30 January 2024, the group will launch the facelifted CX-5 IPM 6 with an expected upward price revision of RM10k (+5%-7%). Despite the price increment, we believe that sales for the all-new CX-5 will be bolstered by the upcoming Chinese New Year festive season demand.

• The anticipated stronger JPY comeback in FY24 after remaining sluggish in FY23 will only have a minimal impact on the group given its limited exposure to JPYdenominated CBU imports. (End-FY24F: 100JPY:RM3.38 vs end of end-FY23: 100JPY: RM3.18)

• The introduction of High Value Goods Tax (HVGT), at a rate of 5-10% in May 2024, is expected to impact the group’s upper-end model offerings (priced RM200k and above), especially Kia Carnival, Mazda CX-9 and highspec CX-8 models. The potential drag in sales volume could be partially cushioned by a robust pipeline of new launches.

• Nonetheless, the group claimed that the government hinted at taxing car models RM300k and above, which is yet to be confirmed. The Malaysia Automotive Association (MAA) is expected to engage with the government for further consideration on HVGT given that the automotive sector is already heavily taxed.

• Meanwhile, we expect a higher Mazda and Kia model supply with a shorter waiting period due to the expansion of the Kulim Inokom plant production capacity from 30k units to 50k units. This will support sales momentum going forward for the group.

• Bermaz Auto is currently approaching its Kia principals to introduce more affordable models to the Malaysian market. Currently, the 11-seater Kia Carnival is the best-selling model, which is under way to shift to CKD. In contrast, the Sorento model’s high pricing resulted in poor consumer reception and stagnant sales volume over the past couple of months.

• Currently, Bermaz Auto is in a 5-month transition period to handover Peugeot distributorship to Stellantis N.V. since the agreement was terminated on 30 November 2023. The group anticipates minimal financial impact and impairment to its balance sheet. Going forward, Bermaz Auto will continue to operate through a dealership system for Peugeot models and provide after-sales services. Labour overheads is expected to be transferred to other business segments, mainly Kia and Mazda.

• In the Philippines market, Bermaz Auto is on track to achieve its FY24F sales target of 2.5k units (1HFY24: 1.3k units). Sales are mainly contributed by high-margin/premium models such as MX-5, Mazda CX-60 and CX-90, averaging at 200 units per month.

• As part of Bermaz Auto’s strategic initiative, the group expanded its network through Bermaz Anshin, one of the group’s subsidiaries by awarding a total of 20 dealerships. Most of the dealers are located in sub-urban areas, which is expected to enhance customer accessibility and support profitability growth in the medium term for BAuto’s associates.

• Although internal combustion engine (ICE) vehicles remain the largest contributor for Bermaz Auto sales, the group is well positioned to participate in the growing market with models such as Kia (EV6 & Niro EV), Peugeot (e-2008 EV) and Mazda (MX30 EV). Furthermore, Bermaz Auto is in active engagement and discussion with a Chinese BEV player to explore a potential partnership.

• On the ESG front, Bermaz Auto is committed to reducing its operations’ carbon emissions and accelerating renewable energy transition with the installation of a solar energy system in its Glenmarie HQ & Mazda Center of Excellence (MCOE) in the Philippines. In FY23, its solar panels generated 279,862 kWH and avoided 85.32 tCO2. Hence, we reaffirm a neutral ESG rating of 3 stars.

• Underpinned by strong sales visibility and order book prospects, the group currently trades at a compelling FY24F P/E of 8x (versus its 5-year average of 12x) with a compelling dividend yield of 6%.

Source: AmInvest Research - 22 Jan 2024