Following our meeting with Bermaz Auto (Bauto) management, we believe the worst is over for the company, given that the car pricing issue in 1HFY20 has been resolved and an array of breath-taking new models should fuel long-term sales prospects. However, we foresee some share-price resistance because of the potential headwinds coming from a more competitive SUV market and weaker consumer sentiment, despite the positive drivers mentioned above. As such, we cut our FY20E earnings forecasts, but raise our FY21-22E earnings by 2%-5% to reflect the pent-up demand in car sales volume. Post our earnings revisions, we maintain our HOLD rating on Bauto with a lower TP of RM1.99 (from RM2.06).

Pent-up Demand to Boost Car Sales in FY21E

We are concerned about the poor consumer sentiment due to the slowing global economy and fears surrounding the COVID-19 outbreak, coupled with the stiffer competition within the SUV space, which may continue to impact Mazda Malaysia sales volumes in the near term. Moving past this phase, we expect sales volumes to gradually improve from 4QFY20, considering the: i) car pricing approval has been rectified, ii) array of new model launches and iii) healthy backlog.

Margin Recovery in Sight, Likely to Hover Between 11.0%-11.5%

Notwithstanding the blip in its 2QFY20 EBITDA margin, we think Bauto EBITDA margins in FY21-22E should gradually normalise to 11.0%-11.5%, given the: (i) higher margin product mix, (ii) higher CKD participation, and (iii) growing contribution of after-sales service/parts.

Associates to Grow on Higher Localisation Programme

Elsewhere, we expect the contribution from the associates (30%-Mazda Malaysia SB and 29%-Inokom) to recover on the back of higher production volume for the Completely Knocked Down (CKD) CX-8. In the long run, Bauto is still eager to obtain a third SUV localisation programme and to upgrade the Inokom production facility.

Maintain HOLD With Lower TP of RM1.99

Post our earnings revisions, we reaffirm our HOLD rating on Bauto with a lower TP of RM1.99 (from RM2.06) based on unchanged 12x CY20E PER as we remain cautious on Mazda’s near-term prospects. At 12x CY20E PER, valuation looks fair. Key upside risk: higher-than-expected car sales volume; downside risks are: (i) supply constraints for Mazda models, ii) delay in car pricing approvals and (iii) forex risks.

Source: Affin Hwang Research - 17 Feb 2020