Review

• Bermaz Auto Bhd (BAuto) registered 2QFY17 core net profit of RM30.6mn (QoQ: -25.5%, YoY: -42.3%). 1HFY17 core net profit declined by 31.9% YoY to RM71.7mn. This was below ours and streets’ estimates, accounting for 36% of full-year forecasts.

• The earnings miss was due to 1) lower contributions from associate companies, 2) margin squeeze from less favorable product mix and 3) lower than expected sales volume from the Malaysian division.

• 2QFY17 topline declined 4.1% QoQ and 12.8% YoY on the back of lower sales volume in the Malaysian division. However, this was partially offset by sales volume growth at the Philippines division.

• CBU:CKD product mix was unfavorable in 2QFY17 (47:53) (4QFY16: 36:64). This was underpinned by an increase in popularity for the Group’s CBU models, particularly the Mazda 2. We note that CKD models have limited exposure to JPY/MYR exchange rate as kits are purchased by Mazda Malaysia.

• We also note that the Group is expected to increase prices in Malaysia for CY17 to counter the depreciating Ringgit.

• BAuto declared second interim dividend of 2.75 sen for 2QFY17, which translates to higher payout of 103% (2QFY16: 54%). This reinforces our expectation that BAuto will continue to payout handsome dividends.

• Separately, BAuto announced additional details on its listing in Philippines. It intends to sell 155mn shares which represent 15.6% of its Philippines unit, Bermaz Auto Philippines (BAP). The sale will be via public issue (83.4mn) and offer for sale (71.6mn). Note that BAuto will still hold a controlling stake of 52.0% (currently 60.4%), which is within expectations.

• In addition, the Group will utilise proceeds for 1) setting up a warehouse and distribution centre 2) build satellite outlets in the Philippines and 3) establish a training facility for automotive repair and motor services.

• According to our back-of-the-envelope estimates, dilution of BAuto’s Phillipines stake will result in a reduction to the Group’s bottomline by RM5-6mn in FY18-FY19 which translates to 2.5% of BAuto’s earnings. This is assuming listing proceeds are entirely paid out to shareholders.

• The listing price is not disclosed at this juncture. However, we expect an attractive special dividend to be proposed for BAuto shareholders upon successful listing. This would provide a boost to dividend yields.

• Nevertheless, we maintain our forecasts for now, pending more clarity from management on this proposed listing.

Impact

• We make the following changes to our model: 1) increased ASPs for FY17- 19, 2) reduced sales volume assumption for FY17-19, 3) reduced margins to account for higher input costs, 4) increased dividend payout assumption, and 5) reduced contributions from associates.

• In summary, our earnings forecasts are lowered by 24.2%/11.1%/10.9% for FY17/18/19

Outlook

• Although we expect Malaysian TIV growth to be rather flatttish in CY17, we see potential growth for BAuto’s sales volume. Unlike other automotive players, it targets a niche market that is less sensitive to an economic slowdown.

• On the other hand, the persistently high JPY/MYR rate will continue to weigh on BAuto’s input costs, and hence impact earnings negatively.

• Going forward, we expect BAuto to pay out 100% of its earnings given subdued capex requirements, and large cash pile of circa RM200mn.

Valuation

• Following our earnings revision, we reduce our TP to RM2.18 (based on unchanged 14x CY17 PER), and downgrade BAuto to Hold. Our recommendation is supported by BAuto’s handsome dividend yield of 6%- 9% for FY17-19. Furthermore, we believe there may be upside upon successful listing of its Philippines arm.

Source: TA Research - 9 Dec 2016