Investment Highlights

• We maintain BUY on Bermaz Auto (BAuto) with an FV of RM2.30. We roll over our valuation base to FY19F and use an unchanged PE of 13x.

• 1HFY18 core net profit was below expectations at 23% of our FY projection and 26% of consensus. We trim our FY18-20 projections by 18-35% to factor in lower volume and margin assumptions going forward.

• 1HFY18 was lower 33% YoY on four factors:

(1) lower domestic sales on poorer numbers for its three key models (the CX-5, M2 and M3). Note that sales were relatively strong up to 2QFY17;

(2) lower operating margins for both Malaysia and the Philippines as sales incentives for the old CX-5 continued up to the launch of the new version in October;

(3) higher interest costs due to an increase in short-term borrowings (from 3QFY17); (4) lower associate earnings as 30%-owned MMSB saw lower production volume of the CX-5 prior to October.

• 2QFY18 saw a QoQ improvement but revenue was flat and net profit fell 28% on a YoY basis. This was largely due to the same factors as above. We believe 2Q marks the bottom for BAuto and its performance should improve on a YoY basis from here.

• BAuto declared a second dividend of 1.6 sen, taking the total 1HFY18 dividend to 3.1 sen. This translates to a payout of 84% vs. 92% in the previous year. Yields of5% are still attractive and based on a payout assumption of 90%.

• We believe BAuto's return to solid ground is premised on seeing better domestic sales, operating margins and associate earnings from MMSB. To this end, BAuto would rely on:

(1) stronger numbers from its three key models to visibly lift TIV from its FY19. Sales of the CX-5 should improve from this month after declines stretching 5 quarters. Local Mazda sales exceeded 1K in October, the first time in one year;

(2) an improvement in margins from a stronger ringgit and reduced sales incentives. The group has made some preparations for the expected increase in the excise duty on cars in the Philippines next year, by stocking up on the CX-5 and CX- 9;

(3) a rebound in production volume for MMSB from this quarter on CX-5 exports to ASEAN and better domestic sales of the model.

Source: AmInvest Research - 11 Dec 2017