This article first appeared in The Edge Financial Daily on September 23, 2019

KUALA LUMPUR: Analysts mostly see an improvement in Bermaz Auto Bhd’s (BAuto) prospects with the upcoming launch of the refreshed Mazda CX-5 sport utility vehicle (SUV) in Malaysia, but views are mixed on whether it will lead to a significant rise in earnings.

There are 14 analysts currently covering BAuto, according to Bloomberg data, and 12 have issued a “buy” rating on the stock with the other two a “hold” call.

The target price (TP) assigned for the counter by the analysts ranges from RM2.50 to RM3.10, with the average 12-month TP at RM2.82 last Friday.

AllianceDBS Research analyst Abdul Azim Muhthar said BAuto is expected to post higher earnings in the second half of the financial year ending April 30, 2020 (2HFY20), with the scheduled release of the facelifted Mazda CX-5 as well as the all-new Mazda CX-8 and CX-30 models.

“I think the CX-5 will do well in terms of sales, as it already has a proven sales track record. The CX-8 has not been released in Malaysia yet, so we have to see what the demand will be like when it is released,” he told The Edge Financial Daily.

In a research note last Tuesday, Abdul Azim said FY20 sales volume is expected to normalise this year in the absence of a tax holiday, unlike last year when there was a three-month tax holiday after the abolishment of the goods and services tax.

PublicInvest Research analyst Nur Farah Syifaa’ Mohamad Fu’ad concurred with this view, and said the upcoming launch of the CX-5, CX-8 and CX30, and the earlier launch of the Mazda 3 in July will drive the company’s sales in 2H.

“However, this could be partially offset by slower demand for BAuto’s Philippine operations,” she said.

Meanwhile, an analyst, who asked not to be named, said the better sales and earnings growth forecast for BAuto is expected to continue beyond 2HFY20.

“When a car company launches new models there is usually a bump in volume. That being said, once sales and production volumes normalise there should be earnings growth moving beyond 2HFY20,” the analyst said.

He admitted that Mazda under BAuto is concentrated within the SUV segment, and the entry of lower-priced units such as Proton Holdings Bhd’s X70 and Perusahaan Otomobil Kedua Sdn Bhd’s (Perodua) Aruz has resulted in some competition within the SUV segment.

However, sales of the Mazda CX-5 saw a 20% year-on-year (y-o-y) increase in the first quarter of FY20 (1QFY20), following efforts by Mazda to shift existing CX-5 stock on to customers.

“It is true that the X70 is more competitively priced against the CX-5, which occupies the same segment. That being said, for BAuto, the people who can afford a Mazda will buy a Mazda. Even when compared with other like car makers such as Honda and Toyota, Mazda is a premium product,” said the analyst.

For 1QFY20, the group’s net profit grew 0.47% to RM50.52 million from RM50.28 a year earlier due to higher foreign currency translation — which stood at RM1.91 million compared with RM1.14 million previously.

Quarterly revenue rose 10.23% to RM535.04 million, from RM485.4 million a year ago, due to higher sales volume and better sales mix from the company’s Malaysia operations.

BAuto saw a higher share in profit contribution from associate company Mazda Malaysia Sdn Bhd, as there was an increase in Mazda CX-5 production volume.

Mazda, however, reported a lower pre-tax profit following a lower gross profit margin due to the Mazda CX-5 run out promotion — with more sales incentives given to clear the CX-5 inventory.

Some analysts have expressed concerns about the increasingly competitive domestic SUV market. They included AmInvestment Bank Research, which expects an earnings contraction in FY20 due to heightened competition in the local SUV market, as well as a shift in consumer preferences towards cheaper and better value-for-money cars, which has negatively impacted premium car sales.

“Furthermore, we also expect BAuto’s Philippine operations to continue being sluggish in the foreseeable future due to the implementation of Tax Reform for Acceleration and Inclusion law,” the research house said.

Year to date (YTD), Mazda has a 2% market share in passenger cars in Malaysia. Meanwhile, its share in the SUV market has also declined from 2018 levels, where it stood at slightly above 30%.

AmInvestment downgraded BAuto to “hold” last Friday, from “buy”, with a lower fair value of RM2.50.

Affin Hwang Capital Research analyst Brian Yeoh said BAuto’s 1QFY20 earnings were within consensus and the research house’s expectations, and maintained his “hold” call and unchanged TP of RM2.60.

UOB Kay Hian Research analyst Desmond Chong said BAuto’s latest order book stands at approximately 1,000 cars, which is below the normal 1,500 level as customers preferred to wait for the official launch of the facelifted and turbo CX-5, as well as the CX-8.

“While we still expect backlog orders to go back above the 1,500 mark after the official launch of the two models, we still expect a weaker FY20 due to the high base in FY19. Our sales assumptions for FY20 and FY21 are 18,020 and 18,820 units respectively, which are marginally below the group’s target of 19,000 and 21,000 units,” said Chong in a research note last week.

On a macro level, Malaysian car sales fell 22% to 51,148 units in August, from 65,550 a year ago — constituting the third consecutive month of y-o-y decline. YTD, vehicle sales declined 6% to 398,335 units, from 423,615 units in the corresponding period in 2018.

According to AbsolutelyStocks, BAuto’s annual operating cash flow (OCF) has been growing since 2017, with the Mazda distributor seeing RM256.97 million in FY19, from RM22.87 million in FY17.

However, quarterly OCF has been declining since 1QFY19, with the group’s 4QFY19 and 1QFY20 quarterly OCF entering the negative territory. For 1QFY20, OCF stood at a deficit of RM9.63 million.

In response to a query on its OCF, BAuto chief executive officer Datuk Francis Lee Kok Chuan said the group recorded a positive cash flow for FY19.

“Last quarter’s [OCF was deficit] is because of the timing of the tax payment of RM29 million during the quarter. If not, it would have been positive,” Lee said in a WhatsApp message.

BAuto’s trade receivables have grown since 2QFY19, reaching RM167.99 million in 1QFY20.

According to another unnamed analyst, one explanation for the quarter-on-quarter increase in trade receivables seen in 1QFY20 could be that the group has been engaging in promotional activities to sell off its existing CX-5 stock, and so sales for the cars have been registered but the proceeds have yet to be paid.

Both the unnamed analyst and Abdul Azim said BAuto’s share price has the potential to rise further but noted that investors are taking a wait-and-see approach to see if the company can truly meet its targeted volume.

“I believe the stock is still attractive to investors as it has a 6% yield,” said the first analyst.

BAuto’s share price closed three sen or 1.3% lower at RM2.27 last Friday, with a market capitalisation of RM2.64 billion.