Bermaz Auto Bhd
(Dec 5, RM2.07)
Upgrade to buy with an unchanged target price (TP) of RM2.30: We recently hosted a site visit to Mazda Motor Corp’s Hiroshima plant. Founded in 1920, Mazda Motor is a multinational premier automaker, ranked 15th in global auto sales in 2018.
With an attractive product line-up and on resolving domestic issues related to pricing, we are upgrading Bermaz Auto Bhd (BAuto) to “buy” (from “hold”) with an unchanged TP of RM2.30 on valuation grounds. At 11 times price-earnings ratio (PER) or 6% yield for earnings in the financial year 2020 estimate (FY20E), BAuto’s valuations look compelling.
Post visit, we are impressed that the Hiroshima plant adopts a mixed production line — the ability to produce multiple car models on the same assembly line. We gather that the current 569,000 units per annum production capacity has reached maximum capacity.
We saw automation mostly in the stamping process area; the final assembly, however, is less automated and is mainly supported by an estimated 10,000 employees. The Hiroshima plant manufactures most of the Mazda sports utility vehicle (SUV) models, while sedans like Mazda 2, Mazda 3 and Mazda 6 are mainly manufactured at the Hofu plant.
We also saw Mazda Motor’s all-new Mazda CX-30 compact crossover SUV, which adopts Mazda’s latest Kodo design language. We learnt that demand for CX-30 in Japan is strong — estimated 6,000 orders since the booking period started at end-October. Positioned as a new core product, the CX-30 will likely hit Malaysian shores by the first half of 2020 (1H20), with indicative pricing of RM143,000 to RM173,000; BAuto targets to sell an estimated 1,000 units per annum.
Mazda Motor believes the Asean market has growth potential, in particular Vietnam, considering: i) the growing young population; ii) growing economy; and iii) rapid motorisation trend. That said, Mazda Motor also highlighted the importance of the Malaysia auto market to the group as it contributed a five-year average 13% of total Asean sales volume between 2014 and 2018.
BAuto’s one month-share price has fallen by around 9%, as the second quarter of FY20 (2QFY20) quarterly results, slated for release on Tuesday, is expected to be sequentially weaker due to the delay in car pricing approvals for its CX-8 model. We are comforted to know that the issue has been resolved, and will not affect BAuto’s second half of FY20 outlook.
At 11 times PER or 6% yield for FY20E, we believe the negatives are priced in and valuations look attractive. We upgrade our call to “buy” (from “hold”) with an unchanged TP of RM2.30 based on 12 times 2020 estimate PER. Key downside risks: Supply constraints on Mazda model and foreign exchange risks. — Affin Hwang Capital, Dec 5