What’s New

• 3QFY17 earnings declined 39% y-o-y on weaker sales and margins; below expectations

• Listing Bermaz Auto Philippines by April 2017

• Cut FY17-19F earnings by 17-30%

• Downgrade to HOLD, TP RM1.85

Earnings dragged by lower volume. We are downgrading our BUY call to HOLD with a lower TP of RM1.85. The challenging environment may pressure sales volume for the group in the coming quarters. Premised on this, we have cut our sales volume growth by 16-28% for FY17F-19F leading to lower earnings. Earnings growth for FY18F should be underpinned by: 1) upcoming new model launches such as the new Mazda CX-5 (in 2HCY17), Mazda CX9 (in mid-2017), and facelifts of Mazda 3 and Mazda 2 (in 1HCY17), 2) potential growth in Mazda Philippines backed by strong GDP growth and new model launches, and 3) completion of capacity expansion in Inokom’s plant to 35,000 units p.a. (+40%) 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 are 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 RM0.12 net cash per share as at end-3QFY17. 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 buyout. Post buyout, 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 5.4% dividend yield for FY17. There could be further dividend surprise from the monetisation of its Philippines unit via a planned IPO.

Valuation

Downgrade to HOLD with TP of RM1.85. We downgrade our BUY rating on BAuto to HOLD with a TP of RM1.85 based on CY17PE of 13.0x.

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.

Source: Alliance Research - 15 Mar 2017