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

Bermaz Auto Bhd
(Aug 13, RM2.13)
Maintain buy with a lower target price (TP) of RM2.59: Bermaz Auto Bhd (BAuto) recently announced that it would honour the zero-rated goods and services tax (GST) price and absorb the sales and service tax (SST) for vehicles booked before Sept 1 but delivered after that date. We expect an order backlog of about 5,000 units as at Aug 31. Due to production bottlenecks, we expect BAuto to continue to deliver an average of 1,000 to 1,100 units per month, and absorb SST of around RM23 million, mitigated by clawing back dealers’ incentives and reducing the advertising and marketing expenses. The impact on margins will be offset by lower sales volatility after September, and potentially higher sales volumes. The higher number of Mazda cars on the road would also help lift contributions at its after-sales and service operations.

BAuto recently launched the 2018 Mazda CX-3’s facelift model and the 2018 Mazda 6’s facelift model during the opening of its 3S Centre in Jelutong, Penang. The completely-built-up (CBU) CX-3 is priced at RM121,000 on-the-road without insurance, while the Mazda 6 CBU model’s pricing has yet to be revealed but likely to be between RM160,000 and RM200,000.

The Philippines’ car market will take time to recover and likely remain lethargic until end-2018. The year-to-date (June) total industry volume is down 12.5% year-on-year at 171,590 units. However, we expect year-end promotions to be a catalyst to jump-start the market. Earlier this year, the Philippine government introduced the Tax Reform for Acceleration Inclusion, which caused car prices to increase.

Key risks to our call include further delays in new model launches and weaker-than-expected consumer sentiment. We trim our financial year 2019 forecast (FY19F) to FY21F earnings by 8% to 15%, after factoring in the SST absorption cost and taking a more conservative stance on our sales volume forecast for both the Malaysia and Philippine businesses.

Our sum-of-parts-based TP has been lowered to RM2.59 from RM2.69 after we rolled forward our base year to 2019 from FY19. The strong pipeline of new models and exposure to regional markets continue to be the key differentiating factors compared with most of its sector peers. We continue to like BAuto as its offers a rare blend of earnings growth and attractive yields. — RHB Research Institute, Aug 13