4QFY18 results beat expectations due to higher-than-expected contribution (+152.8% yoy), driven by 30%-owned MMSB on a ramp-up in CX-5 sales volume. The all-new Mazda 6 is slated for launch in 3Q18 while the CX-8 (CKD) will only hit the market in 2QFY20. BAuto is still trying to list 60.4%-owned BAP in the Philippines. We lift our FY19-20 net profit forecasts by 16% and 21%. Upgrade to BUY with a higher target price of RM2.60, based on 13x 2019F PE. Yields are attractive at 5.9- 7.1%.

RESULTS

• 4QFY18 results above our and consensus’ expectations. Bermaz Auto’s (BAuto) FY18 core net profit of RM142.4m (excluding a RM2.3m impairment loss on receivables) represents 110% and 109% of our and consensus full-year forecasts respectively. The better-than-expected results came from its associates which charted a 152.8% yoy increase in contribution to RM14.1m in 4QFY18, driven by 30%-owned MMSB on a rampup in CX-5 volume for export and domestic markets. An interim DPS of 2.3 sen and a special DPS of 2.7 sen were declared, bringing FY18 DPS to 10.4 sen (FY17: 11.7 sen), representing a payout of 86% of headline profit.

• 4QFY18 revenue rose 61.2% yoy on a 41.2% yoy increase in sales volume to 4,536 units. The higher sales volume came from its Malaysia operation, driven mainly by its CX- 5 model, which saw a 208.4% yoy increase in volume to 2,464 units. 4QFY18 core net profit rose by a higher quantum of 168% yoy driven by: a) a 5.7ppt improvement in EBIT margin in its Malaysia operation due to the strengthening of the ringgit against the Japanese yen, and b) a 152.8% jump in associate contribution to RM14.1m, which came mainly from Mazda Malaysia Sdn Bhd (MMSB) due to ramp-up in production volume for the CX-5 model to cater for the domestic and export markets, which also saw significant margin improvement on improved operating leverage.

• 30%-owned MMSB a positive surprise in 4QFY18, driven by ramp-up in CX-5 volume for exports and domestic market. The CX-5 (CKD), which is locally assembled by MMSB, is also exported to several ASEAN countries (excluding Vietnam) such as Thailand, Cambodia, Indonesia, and Myanmar. CX-5 is BAuto’s star product, which accounted for 45% of its FY18 total sales volume. MMSB recorded net profit of RM44.8m for the quarter (FY18: net profit of RM52.3m) and saw a production volume of 6,655 units for the quarter (FY18: 14,871 units). For 4QFY17, MMSB recorded net profit of only RM10.6m (FY17: net profit of RM20.6m) and saw a production volume of 2,735 units for 4QFY17 (FY17: 10,619 units).

• Listing of Bermaz Auto Philippines (BAP) to be deferred. Management is is still trying to list BAP on the Main Board of the Philippines Stock Exchange but there is no definite timeline for now. Announcement will be made once BAP re-files its listing application.

STOCK IMPACT

• All-new Mazda 6 to hit the Malaysian market in 3Q18 while the CX-8 will only debut in CKD form in 2QFY20. The all-new Mazda 6 will be in complete built-up (CBU). Meanwhile, the CX-8, Mazda’s first 7-seater SUV, will only launched in complete knockdown (CKD) form in FY20 as opposed to the initial plan of launching the CBU form first in 3QFY18. The indicative CKD pricing is estimated to be at RM200,000, and will be competing against the Toyota Fortuner (priced at RM169,800-195,800), and the Mitsubishi Outlander (RM132,000-RM146,000).

• Malaysia to be Mazda’s export hub for ASEAN market. Mazda Japan has plans to make Malaysia its export hub for the ASEAN market. Post completion of the capacity expansion of its US$20m paint shop in Jan 17, its capacity currently stands at 33,000 units p.a.. We gather that there are plans to export to Iran, possibly by end of this year. Iran has passenger car sales of some 1m units.

• Car prices could go up post implementation of SST. Should the SST be set at 10%, which is the rate before the implementation of the GST, car prices are estimated to be 1- 3% higher than GST-inclusive prices. Depending on the quantum of the SST to be introduced, management will either choose to pass on the increase in costs to consumers, or completely/partially absorb the increase in costs.

EARNINGS REVISION/RISK

• In view of the better-than-expected results, we raise our FY19-20 net profit forecasts by 20.5% and 16% respectively after updating our margin assumptions and associate contribution (see RHS table). We also introduce our FY21 projections.

VALUATION/RECOMMENDATION

• Upgrade to BUY with a higher target price of RM2.60 (from RM2.10), following our latest earnings revision, pegged at 13x 2019F PE given that there is no definite timeline to the listing of its Philippines arm (previously 12x PE pegged to Malaysia arm’s 2019F PE and 15x BAP’s 2019F PE).

• Attractive yields of 5.9-7.1% for FY19-21. Given BAuto’s net cash of RM261.5m (or 23 sen per share) and asset-light business model, we estimate a 75% payout for FY19-21, which represents attractive yields of 5.9-7.1%. For the past three years, BAuto’s payouts ranged from 86% to 115%.

Source: UOB Kay Hian Research - 13 Jun 2018