Investment Highlights

• We maintain BUY on Bermaz Auto (BAuto) with an unchanged fair value (FV) of RM2.25/share, based on an FY23F target PE of 13x, at parity with its 5-year historical average.

• BAuto’s outstanding order book remains healthy at 11.9K units – i.e. i) Mazda 10K units; ii) Kia 1.3K units; and iii) Peugeot 600 units – sufficient to fuel its sales at least for the next 7–8 months.

• The group’s booking rate had a rather soft landing post-SST exemption period, clocking 900 orders in July vs. 1,100– 1,200 during a normal period. This is mainly attributed to BAuto’s exercise of absorbing 50% of the SST hike for new bookings starting July until December 2022.

• We view positively the approach to sacrifice a bit of margin to ensure more stable sales, especially against the current uncertain macroeconomic backdrop. The additional cost also could be offset partially, if not entirely, by lower advertising and promotional spending.

• BAuto’s earnings are expected to soften temporarily in 1QFY23 due to lower deliveries of the Mazda brand (Exhibit 1). However, the pick-up in Kia and Peugeot sales as well as its ancillary income from Bermaz Auto Parts is expected to fill some of the earnings gap.

• We are revising our FY23F Mazda sales volume assumption downwards to reflect the lower deliveries (Exhibit 2). On the other hand, we increase our Kia sales assumption following better-than-expected reception on the Kia Carnival. All-in, no change in our FY23F earnings.

• The introduction of the locally assembled CX-30 is the next key rerating catalyst for the company. With the production line currently being set up at the Inokom plant, the completely knocked down (CKD) programme is set to materialise soon.

• The company has yet to reveal the price of the model but looking at Mazda’s product line-up, we believe it will be positioned right below CX-5 at the RM130K–RM160K range, or 8–9% lower than the current completely built-up (CBU) variant.

• On top of the CX-30 CKD, BAuto also would add a 1.5L variant for its CX-3 model. With a lower pricing point at subRM110K, it would widen the model’s target market.

• With the strong sales visibility and earnings catalysts still intact, the company is trading at an attractive FY23F PE of 10x vs. its 5-year historical average of 13x (Exhibit 3). The stock also offers a compelling FY23F dividend yield of 5.6%.

Other key highlights

• The inventory shortage disrupting the delivery schedule of the Mazda marque remains the key concern. The delivery of Mazda cars fell short of expectation in recent months due to a production bottleneck at Mazda Corporation’s level. Nevertheless, the situation is expected to ease gradually as the supply chain readjusts and the Malaysian market remains as one of the principal’s high priority markets given its volume commitment to the Inokom plant. The group delivered more than 1,000 units in July; a significant improvement compared to 511 units reported by Malaysian Automotive Association (MAA) in June.

• Given that the group’s post-pandemic financial performance is recovering well, we do not rule out the possibility of BAuto improving its dividend payout ratio to >70% level, from 65% in FY22. At a 70% payout rate, it will increase the FY23 dividend yield to 6.7%. BAuto’s net cash position now stands at RM494mil vs. net cash of RM358mil as at endFY21 and net debt of RM37mil as at end-FY20.

• Separately, the group’s foreign shareholding remains relatively low at 11.3% as at the June quarter, compared to its pre-pandemic peak of 33%. The company is also considering to be a part of the UN Global Compact – a corporate sustainability imitative lead by the United Nation – with the aim of improving the stock’s investability among foreign funds.

• Key risk: Worse-than-expected shortage of inventory and higher-than-expected inflation which could lead to consumers aggressively cutting discretionary spending.

Source: AmInvest Research - 16 Aug 2022