Bermaz Auto Bhd
(Sept 7, RM2.14)
Maintain buy with an unchanged target price of RM2.71: We remain positive about Bermaz Auto Bhd’s business outlook after our recent meeting with management. Key topics discussed included: i) impact of the sales and services tax (SST); ii) prospects of Bermaz Auto Philippines (BAP); and iii) outlook of the associates. At 13 times price-earnings ratio and 6% yield estimated for financial year 2019 (FY19), valuation still looks attractive.
Bermaz has a relatively high completely built up (CBU) mix in its product offerings. The implementation of the SST should lead to a 1%-3% price increase in Mazda’s CBU car prices (versus the goods and services tax). While the price hikes may affect Mazda’s price competitiveness against the cheaper completely knocked down alternatives, we believe its strong branding and product offerings (for example CX-5) will help offset the impact.
Management is positive about the long-term prospects of 60.4%-owned BAP, supported by the government’s massive infrastructure programme and robust consumer spending. However, we believe the country’s auto industry will likely see flat sales growth this year following the implementation of a higher excise tax on cars earlier this year.
The facelift CBU CX-3 and CBU Mazda 6 were recently introduced in Malaysia. Bermaz is also looking to bring in the all-new Mazda 3 and all-new CX-8, likely by FY20. For now, we believe earnings growth will continue to be supported by the popular demand for existing models, especially the all-new CX-5 and updated Mazda 2.
Earnings momentum from the 30%-owned Mazda Malaysia Sdn Bhd should remain strong, driven by the improvement in production volume for the domestic and export markets, particularly Thailand.
We tweak our FY19-FY21 earnings per share forecasts by 0.2%-0.4% after incorporating Bermaz’s actual FY18 results. We believe the correction in the share price is an opportunity to buy the stock given that: i) resilient sales volume growth; ii) high return on equity business model; iii) sustainable profit margin; and iv) decent net dividend yields of 6%-9%. — Affin Hwang Capital, Sept 7