This article first appeared in The Edge Financial Daily on June 5, 2018
Bermaz Auto Bhd
(June 4, RM2.16)
Maintain buy with a higher target price (TP) of RM2.53: To recap, Bermaz Auto Bhd (BAuto) launched the new Mazda CX-5 in October 2017, which excited the market, and registered about 600 units per month in its third quarter of financial year 2018 (3QFY18) ended Jan 31, 2018. We understand that this was within expectations, and management expects about 800 units per month from 4QFY18 onwards. We note that there are some concerns that the booking period for the CX-5 is lengthy. However, according to our channel checks, the booking period has dropped to one month from about six months when it was first launched. Nevertheless, we believe Malaysian sales in FY19 will not meet our expectations, as competition remains intense. Furthermore, management believes its previous guidance of 14,000 unit sales in FY19 was too optimistic.
Going forward, management plans three new model launches in calendar year 2019 (CY19), namely: i) CX-8 complete knocked-down (CKD) in July or August 2019; ii) new CX-3 in the fourth quarter of CY19; and 3) new Mazda 6 in May or June 2019. We believe CKD versions of the new sport utility vehicles (SUVs) will be available in Malaysia, whilst the Mazda 6 will be introduced as a complete built-up (CBU) model. Besides that, Mazda Japan will be launching its next-generation SKYACTIV-X engine for its 2019 Mazda 3. The new engine is said to combine the free-revving characteristics of a gasoline engine with the fuel efficiency, torque, and fast initial response of a diesel unit. Conservatively, we believe the new engine for Mazda 3 will touch Malaysian shores only in 2020.
After completion of Mazda’s new paint line at its 29%-associate Inokom Corp Sdn Bhd’s Mazda assembly plant in Kulim, Mazda Malaysia Sdn Bhd (MMSB), BAuto’s 30%-owned associate, has begun exporting the CX-5 to various Southeast Asian countries including Cambodia, Myanmar and Thailand. Also, we understand that MMSB will begin exporting to the Middle East by end-CY18. Higher export volumes are expected to drive associates’ contribution from both Inokom and MMSB. According to management, total assembly volume is expected to surpass 24,000 units in FY20 (FY19: 19,000 units). The ramp-up in volumes will largely be driven by increased CX-5 and CX-8 exports.
According to management, the plant will focus on SUV variants — Mazda CX-5, CX-8 and CX-3. Therefore, it is likely that in future, only CBU sedan variants will be sold in Malaysia. We are largely positive about this, as specialisation in the SUV segment will likely lead to higher efficiency, and thus better margins. Against this backdrop, and compounded with expected high regional demand for CX-8, and lacklustre Mazda 3 volumes, we believe BAuto may likely replace the Mazda 3 with CX-8 in its assembly line-up. On the other hand, given the upcoming launch of the all-new Mazda 3 with new SKYACTIV-X engine in 2020, there is a possibility that BAuto may lose out on pent-up demand for this model.
We believe excise tax reform in the Philippines will impact car sales for BAuto Philippines Inc in the immediate term. We note that Mazda car prices have increased by 3.5%-6.5% for certain models after the implementation of the higher taxes. Thus, we turn less optimistic about sales volume in the Philippines and assume increased prices. Management concurs with our view, and believes the Philippines division will register a volume decline in FY19. In view of the cloudy sales outlook, BAuto is expected to shelf the listing of the Philippines division at this juncture. On the bright side, in spite of the delay, management does not discount the possibility of repatriating cash from Philippine operations to be paid out as special dividend. Given BAuto’s asset-light model, we believe this would not be a strain on the group’s balance sheet.
We make the following changes to our earnings forecast: 1) alter sales forecast in Malaysia and Philippines for FY19-FY20 to 13,000-15,000 and 4,600-5,300 units respectively (previously Malaysia: 14,000-15,400, Philippines: 5,800-6,600); 2) increase car prices in Philippines by 5% in FY19 and 3) reduce associates contributions to 10% growth in FY18 versus 50% previously. Thus, earnings forecast is reduced by 3.7%, 9.9%, and 6.5% for FY18, FY19 and FY20.
We revise our TP upwards to RM2.53 (previous: RM2.33) based on lower 13 times (previous: 14 times) CY19 price-earnings ratio (PER) after earnings adjustments and rolling forward our valuation year. The lower PER is in line with peers’ simple average. We continue to like BAuto for its decent dividend yield of 4.9%-6.8% in FY18-FY20 and resilient growth compared to its peers. We understand that the higher excise tax implemented on cars in the Philippines is expected to negatively impact BAuto, hence resulting in a delay of its Philippine listing. Thus, chances of a special dividend are unlikely. — TA Securities Research, June 4