Mazda must zoom through

Mazda sales growing amid dull sector. Maintain BUY on Bermaz Auto (BAuto) with a lower TP of RM2.40. Earnings growth to be underpinned by :1) upcoming new model launches such as the new Mazda CX-5 (in 2HCY17), Mazda CX9 (in mid-17), and facelifts of Mazda 3 and Mazda 2 (in 1H17), 2) potential growth in Mazda Philippines backed by strong GDP growth and new model launches, and 3) capacity expansion in Inokom’s plant to 35k units p.a. (+40%) by end 2016 which will support volume growth for both local and export markets, and lead to an increase in associates’ contribution from FY18.

Light on asset base and heavy on cash. BAuto adopts an asset- light business model as assembly and manufacturing of completely knocked down (CKD) models is undertaken by its 30%-owned associate Mazda Malaysia through third-party assembler Inokom (29%-owned) while it focuses on distribution of Mazda cars in Malaysia and Philippines. Given its strong cash generating business with minimum capex, BAuto is in net cash position with RM0.17 net cash per share as at end-2QFY17. We believe the group will be able to maintain its net cash position in FY17F-19F.

Higher dividends ahead. BAuto had recently gone through a management buy-out. Post buy-out, we expect a high dividend payout as the new controlling shareholders look to pare down borrowings. We assume 100% dividend payout ratio for FY17 vs 97.6% in FY16. This translates to 7.5% dividend yield for FY17. There could be further dividend surprise from the monetisation of its Philippines unit via a planned IPO.

Valuation

BUY with a lower TP of RM2.40. We maintain our BUY rating on BAuto with a lower TP of RM2.40 based on CY17PE of 13.0x, which implies total return of 20.5%.

Key Risks to Our View

Soft auto sales from weak consumer sentiment and tighter lending policy may result in further earnings downgrades. Higher production cost could eat into profits. The group may face higher raw material and operating costs which could soften margins further.

What’s New

2QFY17 results highlights

• BAuto’s 2QFY17 net profit came in at RM30.6m. This brings 1HFY17 net profit to RM71.7m which made up 35%/36% of our/consensus FY17 estimates. The group announced a 2.75 sen dividend which is in line with our forecast.

• Revenue decreased to RM473.2m (-12.8% y-o-y; -4.1% q-o-q), mainly on lower sales volumes of Mazda vehicles in Malaysia at 3,064 units (-20.1% y-o-y; -9.1% q-o-q). However, this was partly mitigated by better sales from Philippines at 1,156 units (-10% y-oy; +15% q-o-q) led by the Mazda 3 and Mazda 2 models. Sales volume should improve in 2HFY17 once capacity expansion is completed by the end of this year which will cater to the demand of Soul Red Metallic colour for the Mazda 3 and Mazda CX-5 (both CKD) models.
   
• In 2QFY17, BAuto recorded profit before tax of RM46.4m (-37.1% y-o-y; -20.8% q-o-q). The drop was in line with lower revenue and higher costs from the stronger Japanese Yen (2QFY17 average JPYMYR of 4.01 vs. 1QFY17’s 3.81). Philippines’ operations improved with EBIT of RM15.2m (+53.5% y-o-y; +32.1% q-o-q).
   
• Sales mix was in favour of CKD models with CBU (completely built up):CKD mix of 47:53 in 2QFY17 and 36:64 in 1QFY17. This could mitigate some of the cost exposed to the volatility of foreign exchange movements.

Proposed listing of Bermaz Auto Philippines

• Based on our assumption of an IPO valuation of 14.0x CY17 PE, we expect BAuto to receive cash proceeds of RM24.4m from Bermaz Auto Philippines (BAP)’s IPO; this would translate into 1.01% dividend yield if the entire amount is paid out as special dividends.

• The listing of BAP is slated to be completed in 1HCY17, diluting BAuto’s stake from 60.4% to 52%. The IPO will include an offer for sale of its existing shares and issuance of new shares. It is expected that RM9m to RM10m of the IPO proceeds will be used by BAP to build 12 to 15 satellite outlets (2S centres) in the Philippines within the next two years. There will also be a warehouse and distribution centre. The entire complex is estimated to cost RM8m to RM10m, excluding land costs.

Revised dividend payout ratio; expect handsome dividends

• We have lifted our dividend payout ratio to 100% for FY17F from 80% previously as guided by management. This leads to a handsome net div yield of 7.5%/8.4%/9.4% for FY17F/18F/19F. We believe the new controlling shareholders would want to reduce its borrowings arising from the management buyout of Berjaya Corp’s stake in BAuto earlier this year. The higher payout ratio also reflects the special dividend which will come from the listing of its Philippines arm, BAP.

Cut FY17-FY19F earnings

• We have cut FY17F/18F/19F earnings by 14%/3%/2% to incorporate weaker sales of Mazda vehicles in Malaysia and weaker margins. We believe the weak consumer sentiment coupled with the weakening of the Malaysian Ringgit has pressured volumes. We expect earnings uplift from FY18 once capacity expansion is completed, which should support volume growth for both local and export markets and increase contribution from associates.

Outlook

Putting up a fight

• Year-to-date Oct 2016 data for auto sales point to Total Industry Volume (TIV) of 466,220 units (-13.9% y-o-y). However, Mazda’s volume was 11,088 units, a contraction of only 4.9% y-o-y. The lower sales was due to more stringent requirements for hire purchase loan approvals, weak consumer sentiment, and supply constraints on certain CKD models due to plant upgrades. We expect volume to improve from the plant expansion and introduction of new variants such as the Mazda CX-9 in 1QCY17, followed by an all-new CX-5 (CBU) in 2HCY17. Other than that, there will be upcoming facelift models for Mazda 2 and Mazda 3 in 1HCY17.

• We remain cautious on the weakening of the ringgit as this will put pressure on costs of imported components and materials. The recent announcement of Mazda planning to hike prices in Jan 17 will help ease pressure on margins. BAuto will also focus on selling more CKD units to reduce exposure to foreign currency, supported by model upgrades and expansion at the Inokom plant.

Valuation

Reiterate BUY with a lower TP of RM2.40. Our TP is based on 13.0x CY17F EPS. We maintain our BUY rating supported by superior ROE from its asset-light business model, and generous dividend yield of 7.5% for CY17, which limits downside risk. Re-rating catalysts will come from (1) higher than expected dividend payout, (2) completion of capacity expansion by end-2016, and (3) listing of its Philippines unit.

Source: Alliance Research - 9 Dec 2016