KUALA LUMPUR (July 24): Hong Leong Investment Bank (HLIB) Research has upgraded Bermaz Auto Bhd to 'buy' from 'hold' after a recent share price drop, as well as strong order book and balance sheet.

The research house noted that the group also projected a higher car volume for the financial years 2024-2025 (FY2024-2025).

The higher volume driven by strong sales demand and localisation of new models for both the domestic and export markets is expected to support the earnings growth contribution of Bermaz Auto’s associates, including Mazda Malaysia Sdn Bhd, Kia Malaysia Sdn Bhd and Inokom Corp Sdn Bhd, said HLIB in a research note.

The research house also maintained its target price of RM2.30 for Bermaz Auto based on an unchanged 12 times price to earnings for the calendar year 2024.

“We believe the current share price has now become an attractive entry point,” said HLIB analyst Daniel Wong on Monday (July 24), following a recent drop in Bermaz Auto’s share price.

“Bermaz Auto still has a relatively strong group order book of 5,500 units, mainly for Mazda.

“The group also has a healthy balance sheet position with net cash of RM437.7 million or 37.5 sen per share as of end-FY2023.”

Bermaz Auto has a 33.3% stake in Kia Malaysia, a 30% stake in Mazda Malaysia and a 29% stake in Inokom, Wong noted.

Mazda Malaysia contributed RM32.3 million in profits to Bermaz Auto in FY2023 versus RM11.1 million in FY2022, driven by higher Mazda cars produced, which rose 38.7% year-on-year (y-o-y).

He added that Inokom’s contribution dropped by 10.3% y-o-y to RM7.2 million in FY2023, due to higher operational costs despite a higher number of cars sold.

Kia Malaysia's contribution was also lower due to initial start-up operation costs in FY2023, but it has already made turnaround in the fourth quarter of FY2023 (4QFY2023), said Wong.

Meanwhile, he said Inokom’s RM237 million investment into a new paint shop will increase overall capacity by 119%. It has a capacity of 50,000 units per annum and is expected to commence operation by end-2024.

“Inokom has also recently secured new contract assembly services from Chery Malaysia, which has reported a strong order book for the newly launched Omada 5 model.

“Both Mazda and Kia are expecting to further increase their assembling volume on higher demand and new model introductions,” he said.

He said Inokom projected total production volume to increase to 40,000 units in FY2024 and 62,000 units in FY2025, from 30,000 units in FY2023.

In the morning trade on Monday, Bermaz Auto's share price remained unchanged at RM2.05, with a market capitalisation of RM2.4 billion.