Bermaz Auto (Bauto) reported a strong set of results – 6MFY19 core net profit expanded by almost threefold to RM124m, came in above consensus and our expectations, delivering 62% and 63% of respective FY19 forecasts. The stronger performance was propelled by higher revenue, improvement in EBITDA margin and earnings surged for its 30%-owned associate, Mazda Malaysia SB (MMSB). At 10x PER and 6% net yield for FY19E, valuations look compelling. Reiterate BUY on Bauto with raised TP of RM2.85.

6MFY19 Core Profits Grew 180% Yoy

Bauto’s 6MFY19 core net profit grew 180% yoy on (i) higher revenue growth (+36% yoy), (ii) improvement in EBITDA margin and (iii) higher contribution from associates. The stronger revenue growth was mainly driven by higher sales volume from domestic demand (+67% yoy, benefitting from the final month of the goods and services tax abolishment). But this was partly offset by lower sales volume from the Philippines (-38% yoy, due to the higher car prices from the increase in excise tax). EBITDA margin grew 3.3ppts to 11.7% due to favourable sales mix and stronger Ringgit (vs. Yen). The associates contribution also ballooned to RM23m (vs. 6MFY18 of RM0.8m) led by the increase in production volume for its CX-5 models for domestic and export markets. In addition, Bauto declared a 3.75 sen interim dividend in 2QFY19, bringing 6MFY19 DPS to 6.25 sen (vs. 6MFY18 DPS: 3.1sen).

Sequentially, 2QFY19 Core Net Profit Grew 47%

Similarly, Bauto’s 2QFY19 core net profit grew by 47% qoq to RM74m, driven by higher sales volume from the domestic market and higher contribution from MMSB. However, EBITDA margin dipped by 1.9ppts to 10.9%, impacted by the absorption of the sales tax, which was incurred to secure future bookings after sales and services tax was reimplemented.

Maintain BUY; Higher TP of RM2.85

We raise our FY19E EPS forecasts to 20.7 sen (from 16.9 sen), after incorporating the stronger 6MFY19 results. Following that, we raise our TP to RM2.85 based on unchanged PER of 16x applied to our EPS in CY19E (from FY19E). We continue to like Bauto for its i) resilient sales volume growth, ii) high ROE business model, iii) sustainable profit margin, iv) decent dividend yield of 6-7%. Maintain BUY. Key risks to our call: i) lowerthan-expected car sales volume ii) supply constraint on Mazda models, and iii) forex risk.

Source: Affin Hwang Research - 13 Dec 2018