1H18 PATAMI of RM42.4m (-41%), came in below expectation of our/consensus at 22%/24%. The negative variance from our forecast was due to the lower-than-expected associates’ contribution attributed to the heavier-than-expected discounts and promotion to clear out the outgoing phasedout Mazda CX-5. We cut our FY18E/FY19E net profit by 19%/8%. TP lowered from RM2.40 to RM2.30. Maintain OUTPERFORM.

1H18 below expectations. The reported 1H18 PATAMI of RM42.4m (- 41%) came in below expectations at 22% and 24% of our and consensus full-year estimates. The negative variance from our forecast was due to the lower-than-expected associates’ contribution attributed to the heavierthan-expected discounts and promotion to clear out the outgoing phasedout Mazda CX-5. A second interim DPS of 1.6 sen was declared for the quarter, bringing 1H18 DPS to 3.1 sen, which is below our expectation. We cut our FY18E/FY19E DPS from 13.5 sen to 11.1 sen.

YoY, 1H18 PATAMI declined by 41% no thanks to: lower revenue growth of 11% attributed to the lower total car sales at 7,402 units (-14%). This was primarily contributed by lower sales in domestic operations at 4,901 units (-24%) as consumers held back for the all-new Mazda CX-5 which was launched in the last month of 2Q18. However, this was cushioned by better performance in the Philippines at 2,501 units (+16%) on higher sales of Mazda 3 models, (total CX-5 sold was at 34% of total volume). Associates’ contribution plunged by 90%, with the share of losses from 30%-owned Mazda Malaysia Sdn Bhd (MMSB) due to heavy discounts and promotion to clear out the outgoing phased-out Mazda CX-5, while cushioned by the positive contribution from 29%-owned Inokom Corp Sdn Bhd but with higher effective tax rate of 26.6% compared to 24.4% in 1H17.

QoQ, 2Q18 PATAMI grew 10% underpinned by: (i) higher revenue (+21%) driven by higher total car sales at 3,965 units (+15%) boosted by higher sales volume of the all-new Mazda CX-5 (total CX-5 sold was at 40% of total volume), and (ii) lower effective tax rate of 26.3% compared to 27.0% in 1Q18.

Outlook. Bermaz Auto expects better sales in 2H18 with the full quarterly contribution of the all-new Mazda CX-5 CKD units (currently at 1,142 units since launch), while supported by the Mazda G-Vectoring (GVC) variants of Mazda 3, 6, CX-3 and CX-9. We expect the all-new CX-5 units to bring in full-year sales of 5k units (from 4.5k units for the outgoing CX- 5, which comprised c.35% to c.40% of its group sales and car volume). For CY18, BAuto is looking to bring in the Mazda CX-8 (a 7-seater SUV model) and the all-new 2018 Mazda 6, while for CY19, BAuto is expected to introduce new generation of its flagship models of Mazda 3.

FY18E/FY19E PATAMI cut by 19%/8%. We cut our FY18E and FY19E PATAMI by 19% and 8%, respectively, to account for the lower-thanexpected associates’ contribution.

Maintain OUTPERFORM. Correspondingly, our TP was lowered to RM2.30 based on the revised 13x FY19E EPS, which is at undemanding valuations level of -1.0 SD of its 3-year forward mean PER (from RM2.40, based on 12.4x FY19E PER). We like Bermaz Auto because of its: (i) solid earnings recovery with the launch of its flagship model, the all-new Mazda CX-5, (ii) superior margins, which is head and shoulders against industry peers (average profit margins of c.8% as compared to peers average at c.2%), and (iii) steady dividend yield of 5.2% with its net cash position which accounts for 8% of market cap and strong 6% FCFE yield (FY18E).

Key risks include lower-than-expected car sales and adverse currency fluctuations.

Source: Kenanga Research - 11 Dec 2017