Investment Highlights

• We maintain BUY on Bermaz Auto (BAuto) with an unchanged FV of RM2.30 based on an FY18F PE of 13x. 1QFY18 core net profit of RM23mil lagged behind our full year projection of RM199mil and consensus' estimate of RM183mil. However, we maintain our numbers in anticipation of better results in the second half of FY18 premised on stronger sales and margins.

• We note three main points from this set of earnings:

1. Revenue climbed for the second quarter from the trough in 3QFY17 (November 2016-January 2017). Sales are still low on a YoY basis largely due to weak numbers for the CX-5 and M3 (which fell 50% and 24% YoY respectively). A meaningful recovery is still tied to seeing better numbers for the three key models which together form 80% of domestic sales: CX-5, M2 and M3. We emphasize that sales for the M2 and M3 have improved in the past two quarters while the CX-5 should improve from the entry of its second-generation model this October. (see Exhibit 3)
2. The company's bottomline in 1QFY18 was hit by the move to clear out the existing CX-5 with various sales incentives. As a result, operating margin in Malaysia nudged up a meagre 1.5ppts on a QoQ basis to 8% (still below the 10-14% seen in sunnier times) despite the average Yen-MYR trending to its lowest point in a year (RM3.84 in 1Q18). PBT was also hit by lower associate earnings (down 87% YoY) from its 30%-owned Mazda Malaysia Sdn Bhd (MMSB) as sales and margins for the existing CX-5 were pared down. The situation on both fronts should improve as the new CX-5 raises local sales and is exported to Southeast Asian markets (sans Vietnam and Singapore).
3. The company will pay a smaller dividend in tandem with the lower earnings, but the payout ratio is higher this time around. It proposed a dividend of 1.5 sen/share (half of the 3.0 sen paid for 1QFY17), but this translated into a higher payout ratio of 86% (vs. 84% in 1QFY17).

• We reiterate a BUY on the following factors: (1) better sales in FY18, counting on a recovery in the three key models; (2) better margins going forward following the price revision made earlier this year, a stronger ringgit and with a smaller need to offer incentives for older models; (3) stronger associate earnings, following the addition of CX-5 exports.

• To this end, we note the following:

1. We project a revenue growth of 25% YoY in FY18 anchored to better Malaysia sales. While the M2 and M3 are slowly inching up towards their historical levels, the new CX- 5 will face a major test next month. The key variant (high-spec 2.0L) could see a smaller price premium of 3% or RM5K (from the first-gen), judging from preliminary prices released in the media, which we believe would be a big factor to jog sales.
2. The combination of a better CKD make-up (from stronger M3 and CX-5 numbers; CKD took up 59% of Malaysia sales here in FY17), more favourable exchange rate (the average Yen-MYR rate has fallen for 3 quarters from the high of 4.01 in 2QFY17) and entry of models at a premium should augur well for margins.
3. We believe associate earnings could more than double in coming years given the addition of CX-5 exports, which are projected at 17K/25K in FY18/19. Its contribution has been minor (hitting a peak of RM14mil last year, accounting for 8% of BAuto PBT).

Source: AmInvest Research - 12 Sept 2017