Bermaz Auto (Bauto) reported a modest set of results – 1Q FY20 core net profit grew by 4% yoy to RM52m on higher revenue and higher associate contribution, but was dampened by weaker margins and higher interest expenses. As expected, earnings momentum was weaker sequentially. Broadly, the results were within market and our expectations. We maintain our HOLD call with an unchanged target price of RM2.60. At 11x FY20E PER, valuation looks fair.

1Q FY20 Core Net Profit Rose by 4% Yoy, Within Expectations

Bauto reported a firmer 1Q FY20 core net profit of RM52m (+4% yoy), underpinned by higher revenue and higher contribution from its 30%- owned associate, Mazda Malaysia SB. Despite weaker revenue from the Philippines (-15% yoy, on supply constraints of Mazda 3 and CX-3 models), Group revenue was up 10% yoy to RM535m, led by higher sales volumes from domestic demand (+15% yoy, driven by existing Mazda CX- 5 run-out promotion in preparation for the facelifted version, due for launch end-September). The higher production of the existing CX-5 also resulted in a 76% boost in associates’ earnings. Meanwhile, 1Q FY20 EBITDA margins saw a 1.9ppt yoy drop to 11% due to the Mazda CX-5 run-out promotion and stronger Yen (vs Ringgit). Broadly, the results were within the street and our expectations – 1Q FY20 core net profit accounts for 21% of street and our full-year profit forecasts. Elsewhere, Bauto declared a higher 3.25-sen interim dividend for 1Q FY20 (1QFY19: 2.5-sen).

Sequentially, Earnings Were Weaker by 16%

Although revenue was flat (-0.6% qoq) due to the existing Mazda run-out promotion, core earnings fell 16% qoq on the back of weaker EBITDA margins (-2.1ppts, similar to the above-mentioned reasons) and higher interest expense (interest cost for lease liability on adoption of MFRS16). Earnings momentum will likely remain weak for another quarter before demand gradually picks up after the launch of the facelifted CX-5 turbo and CX-8 models in Sept-Oct CY19, we believe.

Maintain HOLD Rating and TP of RM2.60

We fine-tune up our FY20-22E EPS following the release of Bauto’s annual report. Post earnings revision, we maintain our 12-month TP of RM2.60, based on an unchanged 12x CY20E target PER. While Bauto’s FY20E PER of 11x is below the historical average of 14x, valuation looks fair, considering flat EPS growth in FY20E. We maintain our HOLD rating.

Key Risks

Key upside risk to our call: higher-than-expected car sales volume; key downside risk: (i) supply constraint on Mazda model, and (ii) forex risks.

Source: Affin Hwang Research - 17 Sept 2019