1Q19 Earnings More Than Doubled

Bermaz Auto (Bauto)’s 1QFY19 core net profit more than doubled to RM50m (+122% yoy), tracking within our and consensus expectations. The favourable results were underpinned by higher revenue contribution (+24% yoy), margin and earnings surge from its 30%-owned associate, Mazda Malaysia SB (MMSB). At 12x PER/7%yield for FY19E, valuations look compelling. Reiterate BUY on Bauto with an unchanged TP of RM2.71.

Higher 1Q Core Net Profit of RM50m (+122% Yoy); Within Expectations

Bauto reported a higher 1QFY19 core net profit of RM50m (+122% yoy) on 24% revenue growth, driven by higher sales volume from domestic demand (+43% yoy, benefiting from the zero-rated Goods and Services Tax period) but partly offset by lower car sales in the Philippines (-26% yoy, due to higher car prices from the increase in excise tax). Also, apart from the revenue growth, its 1QFY19 EBITDA margin further improved by 4.2ppts yoy to 13% on favourable sales mix and stronger Ringgit (vs Yen). Meanwhile, associates earnings spiked to RM5m led by an increase in production volume for the new CX-5 model. All in, the results were in line within market and our expectation, achieving 24-26% of consensus and our full-year forecasts. Elsewhere, Bauto declared a 2.5-sen interim dividend for 1QFY19 (vs. 1.5-sen in 1QFY18).

Sequentially, Core Profit Fell 14%

Sequentially, Bauto’s core net profit fell by 14% on weaker revenue (-15% qoq, affected by lower sales for the Mazda 2 and CX-5, which fell by -39% qoq and -12% qoq respectively) and lower contribution from associates (- 65% qoq, on lower production volume for the CX-5). We believe the supply constraint was irritated by the sudden surge in domestic demand for Mazda vehicles from the 3-month tax holiday and the flooding in Western Japan. Nonetheless, we think production volume would gradually improve in the coming quarters, taking into consideration of the strong bookings for the CX-5. Notwithstanding the slight setback in topline, EBITDA margins expanded 2.2ppts to 13% (vs 4QFY18 of 10.6%).

Maintain BUY; TP Unchanged at RM2.71

We are maintaining our 12-month TP for Bauto at RM2.71 based on an unchanged 16x FY19E EPS. We believe the correction in share price is an opportunity to BUY the stock, given i) resilient sales volume growth, ii) high ROE business model, iii) sustainable profit margin, iv)decent dividend yield of 7-9%. Key risks to our call: i) lower-than-expected car sales volume ii) supply constraint on Mazda models, and ii) forex risk.

Source: Affin Hwang Research - 14 Sept 2018