• We maintain BUY on Bermaz Auto (BAuto) with a fair value of RM2.30 based on an unchanged FY18F PE of 13x.

• FY17 core net profit of RM116mil was 7% below our estimate and 10% below consensus. The result, a 40% decline YoY, was due to weakness in Malaysia where Mazda sales fell 35% YoY and its operating margin declined 4ppts to 9%.

• Malaysia sales were lower as peers offered various incentives and discounts while Mazda held its strategy to sell at full prices. Notable declines were seen in the M2 and M3 (down 44% and 57% respectively). The top 3 models for Malaysia remained the CX-5, M2 and M3 (accounting for 43%, 19% and 16% of Mazda TIV respectively).

• While the Philippines’ sales also dropped (by a smaller quantum of 11% YoY), operating profit actually improved 13% YoY as margins strengthened during the period by 3ppts to 13%. The drop in sales was due to the launch of new models by its peers and the supply constraint on a certain Mazda model (the M3 and CX-5 saw marked declines of 38% YoY and 44% YoY respectively).

• In 4QFY17, core net profit tumbled 54% due to weak Malaysia performance too (sales fell 37% YoY, operating margin halved to 6%). Sales were lower due to intense competition, seasonally low demand and the result was ahead of Mazda's new launches in April. The group said the margin contraction was partly due to the push to sell existing CX-5 ahead of the new version coming in the final quarter of this year.

• The group declared a fourth dividend of 3.15 sen/share, bringing the total payout for FY17 to 11.65sen or 91% of EPS (vs. FY16: 16.90 sen, 97%).

• We reiterate that FY18 will likely see an improvement on the following: (1) better sales, counting on the new CX-5 CKD (September), CX-9 facelift (July) and the various models that came in April (MX-5 RF, M3, M6, CX-3); (2) margin recovery following the recent price revision, and the introduction of new models at a price premium; (3) a rise in associate earnings, following the ramp-up in production and the addition of CX-5 exports to Southeast Asia (ex-Vietnam) from August this year.

Source: AmInvest Research - 14 Jun 2017