• D/G to NEUTRAL from Buy, with new MYR1.74 TP from MYR1.71, 0% downside. 9MFY22 (Apr) results missed our expectations on lower-than- expected Mazda vehicle sales YTD. Bermaz Auto declared a higher dividend of 2.25 sen in 3QFY22 on a stronger set of results, bringing YTD DPS to 4.25 sen. We downgrade the stock following robust share performance (3M: +17%). Valuation is fair at 12.8x FY23F P/E (+1SD from its 5-year mean) – its niche asset light business model should steer the company comparatively better in a challenging CY22 outlook.

• Missed expectations. BAUTO reported 3QFY22 net profit of MYR40.7m (+56% QoQ, +23% YoY), bringing 9MFY22 core earnings to MYR77m (+15% YoY). This led to a higher third interim dividend of 2.25 sen DPS (3QFY21 DPS: 1.5 sen), bringing YTD DPS to 4.25 sen (9MFY21 DPS: 3.25 sen). Despite that, we view this set of results as below our estimates at 54% but in line with Street’s.

• Results review. 3QFY22 revenue improved +29% QoQ on higher group vehicle sales (+29% QoQ) following the relaxation of containment measures. This was also helped by new vehicle contributions from the Kia Carnival CBU and Peugeot 2008. Malaysia Mazda’s vehicle sales grew 17% QoQ but were still 12% lower than that of 3QFY21, leading to a 23% YoY decline in 9MFY22 sales to 7,487 units. On the margin front, 3QFY22 saw group EBIT expanding 0.7ppt to 7.2%, mainly on higher EBIT margins achieved by Mazda and Kia.

• Healthy order backlog. Our check with management suggests that the order backlog remains healthy. Management reassured us there were no shortages in parts and local production is operating as planned.

• Tapping into electric vehicle (EV) incentives. The Kia Carnival (11- seater) is popular amongst the local crowd with its CBU allocation fully taken up. We understand there are plans to bring in additional units to cater for the demand. The CKD is expected to be available around May. In terms of EV, we should see four EV models in 2H22, across the marques they represent (Figure 4).

• We adjust our FY22F-24F earnings by -8%, +1%, and +2%. This is to account for lower FY22F Malaysia sales volume of 11,540 units for Mazda from 12,140 units given the weaker-than-expected 9MFY22’s 7,487 units. Looking forward, we are expecting 4QFY22 to be stronger QoQ, but lower YoY in the absence of a reversal of over-accrued provisions. Our TP incorporates an ESG premium of 2% on the intrinsic value.

• Downside risks include a softer MYR vs the JPY and weak consumer sentiment. Slower-than-expected normalisation in demand post Sales & Services Tax exemption at end 2021 and sustained disruptions in semiconductor chip supplies are other key risks. The converse represents the upside risks.

Source: RHB Research - 11 Mar 2022