Investment Highlights

• We maintain a BUY on Bermaz Auto (BAuto) and upgrade our FV to RM2.60/share from RM2.30. This is pegged to a PE of 14x for FY19 earnings.

• We raised our FY19-20 net profit projections by up to 10% on a better outlook for the ringgit. We lowered our JPY/MYR assumption to 3.8 from 4.0 to reflect this. The JPY/MYR rate has progressively eased from its peak of 3.9-4.0 in early 2017, and has fallen to as low as 3.52 in the recent fortnight.

• We emphasize that although BAuto's dependence on the yen remains significant, it has visibly lessen over time: the portion of CBU in its domestic sales saw a historical low of 35% in the group's most recent quarter.

• This should improve going forward as the group orchestrates a stronger push for its two CKD models that make up over two-thirds of local sales (the CX-5 and Mazda 3), and the addition of a third CKD model in the long term would also provide support.

• We maintain our FY19 sales projections for Mazda (+22% YoY to 13.7K units for Malaysia, +20% to 6K units for Philippines).

• We reiterate that BAuto's return to solid ground is premised on seeing stronger sales, operating margins and associate earnings. 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 quarter after declines stretching over one year. Mazda maintained domestic sales of above 1K/month for two months until November;

(2) stronger margins on a fortified ringgit and reduced sales incentives; (3) stronger production volume for MMSB (its 30%-associate) on CX-5 exports to Asean and better domestic sales of the model

Source: AmInvest Research - 9 Jan 2018