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This article first appeared in The Edge Financial Daily on June 14, 2018

Bermaz Auto Bhd
(June 13, RM2.38)
Maintain buy with a higher target price (TP) of RM2.64:
Bermaz Auto Bhd (BAuto) registered financial year 2018 (FY18) core net profit of RM140.1 million (year-on-year [y-o-y]: +19.1%), which came in within our but above consensus expectations at 104% and 107% of estimates respectively. The earnings growth was a result of: i) better margins due to the stronger ringgit against the yen (FY17: RM0.039 per yen versus FY18: RM0.037 per yen) and better product mix; and ii) associates’ income growing by 52.6% y-o-y.

We believe first half of FY19 earnings recognition will be stronger due to the tax holiday in June to August. Subsequently, earnings should dip as the sales and services tax is implemented. Nevertheless, earnings growth for the full FY19 is underpinned by full-year contribution of CX-5 sales.  

We expect CX-5 sales to register around 800 units per month in FY19 (total CX-5 sales fourth quarter of FY18 [4QFY18]: 2,464 units). Additionally, associates’ income will also increase, underpinned by higher demand for the CX-5. Recall that both Mazda Malaysia and Inokom assemble and manufacture units for the export and domestic markets.  

4QFY18 earnings grew by 41.3% quarter-on-quarter (q-o-q) and more than 100% y-o-y on the back of better earnings before interest and tax (Ebit) margins (4QFY18: 10.4%; 3QFY18: 9.2%; 4QFY17: 7.8%) due to the stronger ringgit. However, this was partially offset by weaker sales in the Philippines.  

Q-o-q volume growth in Malaysia was driven by the new CX-5 launch, which made up 70% of its sales in 4QFY18. On the other hand, sales volume in the Philippines declined by 33% q-o-q after the increase in excise taxes, as implemented by the government. This resulted in a total sales volume decline of 0.9%.  

BAuto declared a fourth interim dividend of 2.3 sen for 4QFY18 and a special dividend of 2.7 sen. This brings total dividend for FY18 to 10.4 sen (FY17: 11.7sen) and implies total payout of 86% (FY17: 112%).

We impute FY18 full-year figures into our earnings model. Thus, earnings are increased by 2.6% and 5% in FY19 and FY20. We also introduce FY21 earnings of RM275.2 million, which implies a 8.4% core net profit growth.

We expect earnings in FY19 to be sustained at current levels, with growth underpinned by the new CX-5 and export activities. Following that, the launch of the new CX-8 complete knocked-down (CKD) will drive growth in FY20.

Going forward, we expect BAuto to continue paying out generous dividends. This is underpinned by subdued capital expenditure requirements and a large cash pile of around RM300 million.  

We note that the listing of its Philippines division has been shelved at this juncture. This is due to the lacklustre outlook, given the increase of car excise duties in the Philippines.  

After the earnings adjustments, we arrive at a higher TP of RM2.64 (previous: RM2.53) based on unchanged 13 times calendar year 2019 price-earnings ratio. We maintain our “buy” call. The group’s handsome dividend yield of 5.3% to 7.1% for FY19 to FY21 will cushion any downside risk. — TA Securities Research, June 13

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