We initiate coverage on Bermaz with a BUY recommendation and TP RM2.70 based on 14x P/E CY20. We expect Bermaz to enjoy strong earnings CAGR growth of +27.7% for FY04/19-21, driven by strong demand for Mazda models in Malaysia, higher production volume for MMSB (for both domestic and regional ASEAN export market) and recovery in the Philippines (FY04/20-21). Bermaz is also in a net cash position of RM345.5m (29.7sen/share) with projected free cash-flow of RM150-230m p.a., supporting Bermaz’s sustainable dividend payout of 15-19sen/share, translating into attractive 7.5-9.5% dividend yield.

Riding on Mazda. Bermaz is involved in the distribution, retailing and also the provision of after sales service of Mazda vehicles in Malaysia and sole distributor of Mazda vehicles in the Philippines (through its 60% owned BAP). The group is also involved in contract assemblies of CKD vehicles via 30% owned MMSB (for Mazda) and 29% owned Inokom (BMW, Mini and Hyundai).

Robust Malaysia sales. Bermaz has registered strong sales volume since the successful launch of the new CX-5 in Oct 2017 with recent Malaysia quarterly sales volume at 3-3.5k units (vs. 2-2.5k units prior to CX-5 launch). With SST absorption program in place (for orders prior to Sep 2018), Bermaz has achieved a historical high backlog orders of 7-8k units (2x more than average quarterly sales volume). Management indicated the cost for the SST absorption program is c. RM10m, a minimal increment in costs as compared to the significant jump in sales volume and overall profits. Furthermore, we are upbeat on Mazda’s new model line-ups - recent launch M6 facelift and CX-3 facelift and upcoming new M3 in 1HCY19 and new CX-8 in 2HCY19, which will sustain Bermaz sales volume post SST2.0 implementation.

The Philippines to recover. The impact from TRAIN tax implementation is expected to be relatively short-lived and BAP’s earnings should recover in FY04/20-21, as the market normalizes while BAP expands its dealership network and launches the highly anticipated new CX-8 in 2HCY19. We expect the delayed IPO exercise of BAP to be revisited again when BAP starts to register strong earnings growth in FY04/20-21. We believe there is large potential in the Philippines market given its large 103.3m population base with low vehicle ownership rate of lower than 4%.

MMSB growth. Being a regional production hub for CX-5 model and upcoming CX-8 model (2019), MMSB is expected to leverage on the trending consumer demand growth for SUV models in Malaysia and South East Asia region. From only domestic Malaysia and export Thailand market, MMSB has also started to export to Philippines, Indonesia, Cambodia, Laos and Myanmar since end CY17.

Strong earnings growth with net cash position. We expect Bermaz earnings growth trend to continue in FY04/19-21 with CAGR of +27.7%, driven mainly by its Malaysia operation (including MMSB) on higher sales volume and margins, while BAP to deliver meaningful recovery in FY04/21. Bermaz has a net cash balance of RM345.5m (29.7 sen/share) as of 1QFY19 with projected free-cash flow of RM150- 230m p.a. for FY19-21 and further upside from dividend up-flow from associates MMSB and Inokom. Hence, we reckon Bermaz is in strong position to deliver dividend payout of 15-19 sen/share, translating into 7.5-9.5% for FY19-21.

Risk. Risks in our view include: (i) fluctuation of foreign exchange towards JPY and PHP; (ii) global supply chain disruption for automotive and manufacturing segments; and (iii) weakened consumer sentiment.

Initiate with a BUY. We initiate coverage on Bermaz with a BUY recommendation and TP of RM2.70 (upside 36.4%), based on CY20 P/E of 14x, supported by: (i) healthy balance sheet with net cash position (29.7sen/share); (ii) sustainable sales growth, generating strong cash flow; and (iii) high dividend yield of 7.5-9.5%.

Source: Hong Leong Investment Bank Research - 14 Nov 2018