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This article first appeared in The Edge Financial Daily on February 8, 2019

Bermaz Auto Bhd
(Feb 7, RM2.19)
Maintain buy with an unchanged target price (TP) of RM3:
Despite delivering a strong set of the first of the financial year ended April 2019 (1HFYApr19) results, Bermaz’s share price is still trading below – one standard deviation of its five-year mean price earnings (PE). We expect the strong earnings momentum to continue in 3QFY19 and there is room for potential upside to earnings with SUV sales as the engine of growth. Sales of four wheel drive (4WD) and/ or sports utility vehicle (SUV) models in Malaysia have outperformed industry growth since 2016 and at the same time, Mazda’s market share in that segment expanded exceptionally well from 9% to 12% within the period. The new CX-5 is selling well while CX-3 sales have been solid. We think Bermaz is in a sweet sport to ride the SUV growth trend as the management is now focusing on improving its CKD sales via the production of SUV units.

 

Our FY19F profit forecast is higher than consensus as we assume higher volumes sold due to the GST tax holiday. We peg our TP at 15 times CY19 earnings per share. We believe this is justified, backed by high margins and solid balance sheet (net cash position).

Stronger-than-expected sales volume will provide further upside to Bermaz. This could potentially come from stronger-than-expected sales performance of new model launches.

Our TP is based at 15 times CY19 EPS, pegged at its five-year mean PE. Weak consumer sentiment and stringent lending policies may dampen sales in the auto sector and put pressure on sales growth. — AllianceDBS Research, Feb 7

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