We believe Bermaz Auto (Bauto) will get over the hump in FY21 – the lockdown easing and cheaper car prices from the sales and service tax (SST) exemption announcement should lift demand for Mazda cars, and hasten earnings recovery from FY21E onwards. However, we are concerned that the weaker macro environment and softer margins may weigh on Bauto’s profitability. As such, we cut our FY21-23E EPS by 11-23%, lower our TP to RM1.50, and downgrade Bauto to Hold. At 13x FY21E PER, Bauto is now trading close to -1SD of its past 5-year mean of 11x, which looks fair to us.

Anticipate a recovery for Malaysia operations, but not for BAP just yet

Mazda sales recovered in the month of May 2020, and bookings for Mazda cars have also surged to c.1.4k units as Malaysians have responded favourably to the cheaper price tags resulting from the sales and service tax exemption announcement and extended service maintenance for Mazda cars. Despite these encouraging signs, we think the challenging consumer environment may continue to cap sales growth for discretionary goods. Bauto’s 60.4%-owned Bermaz Auto Philippines (BAP) is also experiencing a recovery, but we think the resurgence of the Covid-19 outbreak also may clamp down on discretional spending in the Philippines.

Associates Contribution to Improve on Better Sales for CKD Models

Similarly, we also expect the contribution from its associates to recover slowly since the Inokom plant and Mazda showrooms are back and running. Moving on, Bauto has big ambitions to grow – Inokom expansion plans are still intact, and Bauto is considering to expand its localisation programme with the CKD CX-30 and CKD MX-30 projects.

Dividend Payout at Risk, But Yields Are Still Decent

Management is guiding for a lower 50% payout ratio from its Malaysian operations earnings, compared to its 5-year average dividend payout of 95% of PATAMI previously. Bauto is intending to preserve cash to tidy its balance sheet as well as to fund its expansion plans. As such, we estimate DPS of 5-7sen, which implies dividend yields of 3-5% for FY21-23E.

Downgrade to Hold With a Lower TP of RM1.50

We cut our FY21-23E EPS by 11-23% after lowering our sales forecasts and EBITDA margin assumptions. In tandem, we lower our TP to RM1.50 (from RM2.38) based on a lower 12x CY21E PER (from 15x). Key risks to our call: (i) higher-/lower-than-expected car sales volume, (ii) supply constraint on Mazda models, and (iii) forex risks

Source: Affin Hwang Research - 8 Jul 2020