• Maintain BUY and MYR2.35 TP, 28% upside. Bermaz Auto’s 1QFY23 met our expectations, but DPS exceeded our estimate. The group continues to work towards fulfilling its large order backlog, even amidst continued chip shortages. With only two models – the Carnival and EV6 – Kia has taken in encouraging orders and we expect further growth in the brand, driven by more new model launches. We still like BAUTO for its attractive FY23F (Apr) 7% yield and continued growth in the Peugeot and Kia brands.

• Within expectations. 1QFY23 core earnings of MYR50m came within our and Street expectations, at 25% and 28% of full-year estimates. 1QFY23 DPS was above expectations, at 3 sen (FY23F: 10 sen)

• Results review. 1QFY23 core earnings softened 36% QoQ, mainly due to a 20% QoQ decline in revenue and a slight easing of margins from a seasonally stronger 4QFY22 and a lower CKD:CBU mix. Revenue fell, mainly due to a 25% QoQ decline in total cars sold. In 1QFY23, Bermaz received a large shipment of CBU Mazdas, which made up 37% of Mazda sales in the quarter (vs 14% in 4QFY22). Notably, Kia sales more than doubled, with maiden contributions from the EV6 and CKD Kia Carnival. While revenue from the Philippines rose 3%, its operating profit jumped >500% mainly due to: i) Better ASPs, as it has cleared a lot of the old inventory accumulated from previous years, and ii) lower overhead costs.

• Outlook. BAUTO’s order backlog remains healthy, and can sufficiently sustain the group for more than two quarters, per our calculations. We estimate that its Mazda orders in July had fallen by more than 50% from the 1H22 average, but have recovered in August. We believe the orders fell strongly, mainly because BAUTO saw stronger-than-peers’ orders in May. Orders for Kia remain strong, being almost entirely driven by the encouraging orders for the Kia Carnival. With more new Kia models to be launched, we think the brand will continue to perform well. We gathered that, unlike the other companies, BAUTO’s car sales is still weighed down by the chip shortage, while it still lacks visibility on its CBU allocation.

• We maintain our forecasts, as earnings are in line. Because 1QFY23 DPS beat our expectations, we lift our FY23-25F DPS to 13-16 sen from 10-13 sen, conservatively assuming a payout ratio of <80%. Pre-pandemic, BAUTO has consistently paid out >80% of its earnings, implying further upside from our current DPS estimates.

• Maintain BUY and a TP of MYR2.35, based on 13x FY23F P/E. Our TP includes a 4% ESG premium. Currently, the stock is trading at 10.6x FY23F EPS – near -1SD from its 5-year historical average P/E, which we think undervalues the stock. We continue to like BAUTO for its 7% FY23F yield, and the growth of its Peugeot and Kia brands. Key downside risks include a strengthening JPY/MYR rate, poorer-than-expected car sales, and worse- than-expected component shortages.

Source: RHB Research - 13 Sep 2022