This article first appeared in The Edge Financial Daily on December 4, 2019
Bermaz Auto Bhd
(Dec 3, RM2.06)
Maintain outperform with an unchanged target price (TP) of RM2.75: Bermaz Auto Bhd’s (BAuto) results are due to be released next week. We expect its second quarter ended Oct 31, 2019 (2QFY20) core net profit (CNP) to come in between RM40 million and RM45 million (-21% to -11% quarter-on-quarter [q-o-q]; -46% to -39% year-on-year [y-o-y]). We attribute this to weaker Mazda sales of 2,454 units (-15% q-o-q; -49% y-o-y), based on Malaysian Automotive Association (MAA) data, after: i) back orders filled from the zero-rated tax discount period, particularly for its outgoing CX-5; ii) expected lower contributions from associates due to lower production volume as Mazda Malaysia Sdn Bhd ceased outgoing CX-5 production in July 2019, but in August, it switched the production to that of the all-new CX-5 and CX-8; and iii) order deliveries were delayed for the all-new CX-5 and CX-8 due to pricing approval issues. Last year was also seen as a strong base benefitting from backlog order delivery for zero-rated tax holiday sales. Our assumption for its 2QFY20 CNP is based on the vehicles’ average selling prices in the past three quarters. Note that about 67% of its 1QFY20 unit sales were contributed by the all-new Mazda CX-5, bringing the first half of FY20’s (1HFY20) to RM90.5 million-RM95.5 million. The group’s 1HFY20 Mazda sales were 5,714 units (-24% y-o-y), based on MAA data. We feel positive on its 2HFY20 prospects which could be better than the first half’s, riding on the recently launched face-lifted/turbo CX-5 (on Oct 22) and the all-new CX-8 (on Nov 13) as well as supported by the all-new CX-30 (completely built-up; on Nov 20).
BAuto’s Philippine market will continue to be impacted by the Tax Reform for Acceleration and Inclusion (Train) law, effective since January 2018. The Train law has caused an increase in excise tax of up to 7% and consequently higher car prices, affecting demand for motor vehicles in the country. BAuto plans to preserve its sales volume by increasing its dealerships there to 21. Note that its 60.4%-owned BAuto Philippines still experienced volatile sales volume in 1QFY20 at 527 units (-18% q-o-q; -34% y-o-y).
We maintain our “outperform” call with an unchanged TP of RM2.75. We like BAuto for its: i) expected earnings recovery on a stream of all-new models; ii) superior margins above its peers in the industry, with an average profit margin of about 9% versus its peers’ of about 2%; and iii) steady dividend yield of about 8%.
Risks to our call include: i) lower-than-expected car sales volume; and ii) unfavourable foreign exchange. — Kenanga Research, Dec 3