We reaffirm our BUY rating on Bermaz Auto (Bauto) with an unchanged 12-month TP of RM2.85. We continue to like Bauto for its: (1) solid earnings outlook, (2) high ROE business model, (3) superior profit margins vs peers (Fig. 4), (4) decent dividend yield of 6% and (5) undemanding valuation of 10x FY19E PER. Despite an anticipated earnings surge in FY19, PE multiples have suffered an unwarranted derating, possibly as investors remain cautious on (i) vehicle affordability affecting Malaysian auto sales, (ii) earnings momentum riding on the Mazda flagship SUV, the CX-5 and (iii) intense competition as other auto players are also aggressively lining up new launches (ie, Proton X70, Perodua SUV). Despite this scepticism, Mazda’s 11M18 sales market share continued to expand to 2.6% (vs. 11M17 of 1.7%), providing us comfort on Bauto’s earnings trajectory moving forward.

Aggressive Model Line-ups to Lead Sales Momentum

We expect sales momentum to remain robust in FY19-21E on continued demand for the CX-5 and new car model launches. In the immediate term, we think the popular demand for existing model line-ups, coupled with the 3k backlog of orders (against projected sales of 12.6k units for FY19) should sustain 2HFY19 sales volume. The expected launch of the all-new Mazda 3 (in mid CY19), all-new M6 and all-new CX-8 (in 2HCY19) and the all-new CX-3 should push sales forward in FY20-21E. We learnt that the design language for the next generation CX-3 would be based on the Mazda 3 platform, which is bigger and more appealing.

EBITDA Margins Will Remain Healthy

We think EBITDA margins should remain healthy, underpinned by higher CKD participation and strengthening of the Ringgit over the long term. However, the EBITDA margin may soften in 2HFY19, in view of the temporary weakness in the Ringgit (vs. Yen). The continued downward trend of the Ringgit vs. Yen will adversely impact Bauto’s profitability as more than 30% of COGS is denominated in Yen. To protect its margins, we think Bauto may hike prices of Mazda cars in CY19. Recall, Bauto hiked prices of Mazda cars back in 2017 and 2018 due to unfavourable forex movements. Notwithstanding the tax holiday boost in 2018, Mazda sales volume dipped by 22% after the 2017 price hike, in tandem with the performance of most auto players in 2017. Despite that, we think that the improved consumer sentiment/spending power and an upcoming replacement cycle would anchor more sales for Bauto.

Source: Affin Hwang Research - 3 Jan 2019