This article first appeared in The Edge Financial Daily on July 22, 2019

Bermaz Auto Bhd
(July 19, RM2.54)
Downgrade to hold with a lower target price (TP) of RM2.60: Moving into financial year ending 2020 (FY20), we expect Mazda sales volume to moderate from its recent high of 19,000 units due to a lower take-up for Mazda CX-5, as the Proton X70 is luring away some price-sensitive consumers in the crowded compact crossover-sport utility vehicle (SUV) market. Also, we think the performance of Bermaz Auto Bhd’s (BAuto) new model launches in the medium term (for example, the all-new Mazda 3, all-new Mazda CX-8, refreshed CX-5 2.5L turbo and all-new CX-30) are unlikely to outdo the CX-5 due to higher price points against their peers. However, we expect a mild recovery for BAuto’s 60.4%-owned Bermaz Auto Philippines to cushion the blow. To recap, the Philippines’ cumulative six months in 2019 industry sales ended on a positive note (+1.5% year-on-year [y-o-y] to 174,000 units).

We expect BAuto to enjoy earnings before interest, tax, depreciation and amortisation (Ebitda) margins of 12% in FY20-22E underpinned by: i) a higher-margin product mix; ii) higher completely-knocked-down (CKD) participation; iii) a strengthening of the ringgit against the yen over the long term; and iv) growing contribution of after-sales service and parts.

BAuto is eager to catch a third SUV localisation programme, after the CX-5 and CX-8. This will require BAuto and its partners to invest about RM200 million to upgrade Inokom Corp Sdn Bhd’s production facility, which will see its capacity increased from the current 30,000 to 50,000 units per annum.

We cut our FY21-22 earnings per share by 10-13% after lowering our sales forecasts and Ebitda margin assumptions to 12% (previously 12-14%). In tandem, we downgrade BAuto to “hold” (from “buy”) with a lower 12-month TP of RM2.60 (from RM3.20) based on a 12 times calendar year 2020 price-earnings ratio (PER) (three-year mean forward PER from 14 times) as we have turned cautious on Mazda’s near-term sales volume. Key risks to our call: i) higher/lower-than-expected car sales volume; ii) supply constraint on Mazda models; and iii) foreign exchange risks. — Affin Hwang Capital, July 19