Bermaz Auto (Bauto) reported a weak set of results – 9MFY20 core net profit fell by 52% yoy to RM99m, affected by weaker revenue (-25% yoy), a weaker EBITDA margin and a lower contribution from associates. On the whole, the results were within our expectations but below consensus. We maintain our earnings forecasts and our price target of RM1.20. Reiterate SELL. At a 12x FY20E PER, Bauto’s valuations looks expensive, considering its challenging business outlook amidst the Covid-19 outbreak.

9MFY20 Core Net Profit Fell by 52% Yoy; Within Expectations

Bauto’s 9MFY20 core net profit fell by 52% yoy to RM99m on: i) weaker revenue (-25% yoy, on lower Mazda sales volumes for both domestic and Philippines operations), ii) weaker EBITDA margin and iii) lower associate contribution. Bauto’s 9MFY20 EBITDA margin contracted by 3.9ppts to 7.5%, attributable to lower sales volume, a weaker Ringgit (vs. Yen) and higher costs on the facelifted Completely Knocked Down (CKD) Mazda CX-5 model. We suspect the higher costs could be due to higher excise duties imposed on the CKD vehicles based on the revised excise duty regulations. After many rounds of negotiations with the authorities, we learnt that Bauto has finally salvaged back some rebates on the pricing for the CKD units, and this should mean margins recuperate gradually in 4QFY20, we believe. In addition, the weaker sales volume/margin also resulted in a 43% yoy decline in associates’ earnings. Overall, the results were broadly within our expectations but below the street’s respectively – accounting for 70% and 56% of our and the street’s full-year forecasts respectively.

Sequentially Higher on Low-base Effect

As expected, Bauto’s 3QFY20 core earnings rose by 22% qoq due to a low-base effect. Recall, 2QFY20 revenue/margin declined due to the delay in car pricing approvals for the facelifted CX-5 and all-new CX-8 models. The Group had to roll out the pre-facelifted CX-5 models to sustain the sales volume. In addition, Bauto has begun selling the all-new Mazda CX-8 in 3QFY20, which helped to lift the EBITDA margin slightly by 0.3ppts to 5.7%. Elsewhere, Bauto has announced a third interim dividend of 1.45 sen (3QFY19: 4.5 sen), bringing cumulative 9MFY20 dividends to 7.45 sen (vs. 9MFY19 dividends of 10.75 sen).

Source: Affin Hwang Research - 17 Mar 2020