Bermaz Auto (Bauto) reported a disappointing set of results – 6MFY19 core net profit fell by 41% yoy to RM73m, due to weaker revenue, weaker EBITDA margins and a weaker associate contribution. All in, the results were below street and our expectations. We cut our FY20-22E EPS forecasts by 16-25% and lower our TP to RM2.06 (from RM2.30). At 12x FY21E PER, Bauto’s valuation looks fair. We downgrade our call to HOLD from Buy.

Sequentially, 2QFY20 Core Net Profit Fell by More Than Half

Sequentially, Bauto’s 2QFY20 core net profit fell by more than half to RM21m, dampened by: 1) weaker revenue, 2) weaker EBITDA margins and 3) a lower associate contribution. 2QFY20 revenue fell by 15% qoq to RM457m, due to lower domestic demand (-20% qoq; the launch of the allnew CX-5 turbo and CX-8 was affected by the delay in car pricing approvals), partially cushioned by higher Philippines demand (+25% qoq; on higher Mazda 3 sales volume). Notably, Bauto’s 2QFY20 EBITDA margin hit its lowest level since 3QFY13 – the 2QFY20 EBITDA margin eroded by 5.5 ppts to 5.4% (3QFY13 EBITDA margin: 4.1%), in our view due to: i) lower domestic sales volume, ii) Mazda CX-5 run-out promotion and iii) stronger Yen (vs. RM). The slower production for the CX-5 and the CX-8 also resulted in a 24% qoq decline in associate earnings to RM6.5m. Nonetheless, we expect sequential 3QFY20 earnings to gradually improve from a low base, as we learned that the car pricing approval issue has been resolved.

6MFY20 Core Net Profit Fell by 41% Yoy; Below Expectations

Bauto’s 6MFY20 core net profit declined by 41% yoy to RM73m, undermined by the above-mentioned factors. Overall, the 6MFY20 results came in below our and market’s expectations, accounting for 31-33% of street and our full-year forecasts. The earnings disappointment was mainly due to the weaker-than-expected EBITDA margins (6MFY20: -3.3ppts to 8.4%). Bauto announced a second interim dividend of 2.75 sen (2QFY19: 3.75 sen), reducing 6MFY20 dividends to 6 sen from 6.25 sen in 6MFY19.

Downgrade to HOLD With a Lower TP of RM2.06

We cut our FY20-22E core EPS by 16-25%, after imputing the weak 6MFY20 results as well as lowering our revenue and margin assumptions. In tandem with our earnings cut, we have lowered our TP to RM2.06 (from RM2.30) based on unchanged 12x CY20E PER. At 12x FY21E PER, Bauto is currently trading at its 3-year mean, which looks fair considering the weak revenue outlook and rising competition in the SUV space. Downgrade to HOLD (from Buy).

Key Risks

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

Source: Affin Hwang Research - 11 Dec 2019