• Despite encouraging sales momentum on sales-tax relief and aggressive promotional campaigns, management has a cautiously optimistic outlook.
• Bauto’s EBITDA margin and contribution from associates should recover in tandem with the better sales/production volumes for Mazda cars.
• Maintaining our Hold rating on Bauto with TP of RM1.35. At 13x CY21E PER, valuation looks fair.

Bauto Had a Weak FY21 Start

To recap, Bauto’s 1Q FY21 core profit plunged by 80% yoy to RM10m, on lower revenue, margins and losses from 30%-owned Mazda Malaysia SB (MMSB). That said, 1Q FY21 profit fared better sequentially, up 48% qoq, as the Group was allowed to resume operations in mid-May after the Movement Control Order (MCO) eased.

Malaysia Mazda Sales Set to Pick-up From the Trough

Based on Malaysia Automotive Association (MAA) data, Mazda’s July sales rebounded by 20% mom to 1.2k units (+20% yoy), due to the i) lockdown easing, and ii) lower car prices from the Sales and Service Tax exemption and extended warranty/service maintenance on Mazda cars. We learnt from the briefing that the encouraging sales momentum helped the Group not only to reduce its inventory level to <2 months (vs. 3-4months previously) but also strengthen its financial position: net cash of RM71.1m as at end-1Q FY21 (vs. net debt of RM37.5m as at 4Q FY20). Bookings for Mazda cars also improved to c.2k units, and we expect the sales trend to remain favourable during the SST exemption period. However, we are concerned that this momentum may wane moving in 4Q FY21, when the SST exemption expires. Bauto plans to introduce the all-new MX30 and all-new BT50, likely in 1H CY21, but we believe these low-volume models may not be enough to retain the crowd’s interests for Mazda cars moving forward.

Philippines Operations Still Not Out of the Woods, in Our View

Bauto’s 60.4%-owned Bermaz Auto Philippines (BAP) has reported losses for 2 consecutive quarters on weaker sales volume/margins. Mazda’s 1Q FY21 sales volume fell by 66% yoy to 177 units. Although the Philippines July sales volume improved by 32% mom to 20.5k units, management noted that the trading environment remains challenging, given that Philippines still has high infection/death rates in ASEAN due to COVID-19, despite implementing the longest and strictest lockdown in the region. Thus, we forecast BAP’s FY21E sales volume to fall 25% yoy to 1.7k units. The Philippines operations contributed c.12% of Bauto’s FY20 PBIT.

Source: Affin Hwang Research - 15 Sept 2020