This article first appeared in The Edge Financial Daily on December 12, 2017

Bermaz Auto Bhd
(Dec 11, RM2.16)
Maintain outperform call with a lower target price (TP) of RM2.30: The reported first half financial year 2018 (1HFY18) profit after tax and minority interests (Patmi) of RM42.4 million (-41%) came in below expectations at 22% and 24% of our and consensus’ full-year estimates. The negative variance from our forecast was due to the lower-than-expected associates’ contribution attributed to the heavier-than-expected discounts and promotion to clear out the outgoing phased-out Mazda CX-5. A second interim dividend per share (DPS) of 1.6 sen was declared for the quarter, bringing 1HFY18 DPS to 3.1 sen, which was below our expectations. We cut our FY18/FY19 DPS from 13.5 sen to 11.1 sen.

Year-on-year (y-o-y) the 1HFY18 Patmi declined by 41%, no thanks to lower revenue growth of 11% attributed to lower total car sales at 7,402 units (-14%). This was primarily contributed by lower sales in domestic operations at 4,901 units (-24%) as consumers held back for the all-new Mazda CX-5 which was launched in the last month of the second quarter of FY18 (2QFY18). However, this was cushioned by better performance in the Philippines at 2,501 units (+16%) on higher sales of Mazda 3 models, (total CX-5 sold was at 34% of total volume).

Associates’ contribution plunged by 90%, with the share of losses coming from 30%-owned Mazda Malaysia Sdn Bhd due to heavy discounts and promotion to clear out the outgoing phased-out Mazda CX-5. This was cushioned by the positive contribution from 29%-owned Inokom Corp Sdn Bhd but with a higher effective tax rate of 26.6% compared to 24.4% in 1HFY17.

Quarter-on-quarter (q-o-q), 2QFY18 patmi grew 10% underpinned by: i) higher revenue (+21%) driven by higher total car sales at 3,965 units (+15%) boosted by higher sales volume of the all-new Mazda CX-5 (total CX-5 sold was at 40% of total volume), and ii) lower effective tax rate of 26.3% compared with 27% in 1QFY18.

Bermaz Auto expects better sales in 2HFY18 with the full quarterly contribution of the all-new Mazda CX-5 completely-knocked-down (CKD) units (currently at 1,142 units since launch), while supported by the Mazda G-Vectoring variants of Mazda 3, 6, CX-3 and CX-9. We expect the all-new CX-5 units to bring in full-year sales of 5,000 units (from 4,500 units for the outgoing CX-5, which comprised about 35% to 40% of its group sales and car volume). For calendar year 2018 (CY18), Bermaz Auto is looking to bring in the Mazda CX-8 (a 7-seater SUV model) and the all-new 2018 Mazda 6, while in CY19, Bermaz Auto is expected to introduce a new generation of its flagship Mazda 3 models. — Kenanga Research, Dec 11