Review

• Bermaz Auto Bhd (BAuto) registered 3QFY17 core net profit of RM25.1mn (QoQ: -18.0%, YoY: -39.0%). 9MFY17 core net profit declined by 33.9% YoY to RM96.8mn. This was below ours and streets’ estimates, accounting for 69% and 58% of full-year forecasts respectively.

• The earnings miss was due to 1) lower contributions from associate companies, 2) lower than expected ASPs in Philippines and 3) higher finance costs due to recent take-up of borrowings.

• The lower contribution from associates (QoQ: -97.4%, YoY: -97.8%) was due to the weak automotive sector coupled with unfavorable movement in forex. Note that Mazda Malaysia pays its parent company Japanese Yen but sells to BAuto in Ringgit.

• The drawdown of RM91mn short-term borrowings which increased finance costs came as a surprise. Management revealed that the borrowings were more for convenience as opposed to necessity. BAuto currently has circa RM200mn cash in its coffers.

• It is interesting to note that Malaysian revenue decreased by 31% QoQ but EBIT registered flattish results. This is in-line with management’s strategy to incentivize its dealers to sell higher margin models.

• Total sales volume decline significantly by 30.5% QoQ and 40.9% YoY which is in-line with the current operating environment. The decline in sales volume was largely within expectations. However, we note that Dec 2016 registered the lowest sales volume in FY17. Hence, we expect 4QFY17’s volume to improve marginally.

• BAuto declared second interim dividend of 2.75 sen for 3QFY17, which translates to higher payout of 126% (3QFY16: 60%). This reinforces our expectation that BAuto will continue to payout handsome dividends and may dip into its cashpile to do so.

Impact

• We 1) reduce Philippines ASPs, 2) reduce associates contribution and finance income, and 3) increase dividend payout as we expect BAuto to payout more than 100% of earnings.

• Thus, our earnings are reduced by 11.1%/1.9%/1.9% in FY17/18/19.

Outlook

• We expect FY18 to be a significantly better year with total sales volume growth of 17% for BAuto. This is underpinned by the new CX-5 and CX-9 CKD launches.

• On the other hand, the persistently high JPY/MYR rate will continue to weigh on BAuto’s input costs, and hence impact earnings negatively. That said, the recent price hike will partly offset the weak Ringgit.

• Going forward, we expect BAuto to pay out more than 100% of its earnings given subdued capex requirements, and large cash pile of circa RM200mn. Furthermore, we expect a special dividend arising from the listing of the Philippines division.

Valuation

• We lower our TP to RM2.36 (previous: RM2.41) based on unchanged 14x CY18 PER, and maintain our Buy recomendation on BAuto. 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 - 15 Mar 2017