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This article first appeared in The Edge Financial Daily on March 18, 2020

Bermaz Auto Bhd
(March 17, RM1.23)
Downgrade to hold with a lower target price of RM1.45:
For the third quarter ended Jan 31, 2020 (3QFY20), Bermaz Auto Bhd’s (BAuto) reported core profit after tax and minority interest (Patami) of RM25.6 million, bringing its nine months of financial year 2020’s (9MFY20) sum to RM99.4 million, against Hong Leong Investment Bank’s FY20 profit forecast of RM163.4 million or 60.8% and the consensus’ RM177.9 million (55.9%).

Disappointments were due to a lower-than-expected sales volume in Malaysia following delayed launches of the CX-5 and CX-8 models, deteriorated operating margins on higher regulatory costs in Malaysia, a lower group sales volume and the Japanese yen appreciation against the ringgit and Philippine peso.

Despite the disappointing results, BAuto still declared a third interim dividend of 1.45 sen per share — with an ex-date of May 4, 2020 — given its strong balance sheet and high net cash holding. Its total dividend declared for 9MFY20 was 7.45 sen per share.

Quarter-on-quarter, BAuto’s core earnings improved 19.6% following a better sales mix — with new contributions from CX-8 and CX-30 models — and a higher associate contribution from its 29%-owned Inokom Corp Sdn Bhd on a higher sales volume.

Following a lower volume of Mazda sales in Malaysia and lower associates’ — Mazda Malaysia Sdn Bhd (MMSB) and Inokom — production volumes, BAuto’s core Patami dropped 68.9% year-on-year and 51.7% year to date.

BAuto had been phasing out its existing inventory of previous CX-5 model in 9MFY20 and faced delays in launching the facelift CX-5 in 2QFY20 and the new CX-8 in 3QFY20, as well as higher regulatory costs. Further, BAuto and MMSB margins were affected by a strengthening yen against the ringgit. Nevertheless, Bermaz Auto Philippines Inc’s contribution further improved in 3QFY20 following sales contributions from the new Mazda CX-30 and CX-8.

The Covid-19 outbreak has severely affected global economic activities. As such, we expect the Malaysian economy to slow further, below Bank Negara Malaysia’s target of 4.3% to 4.8%, and potentially impact consumer sentiments in the near term.

Nevertheless, the government has started implementing a stimulus plan to support the economy. However, the Philippines has started a lockdown in the capital Manila for a month until mid-April to contain the pandemic.

Our FY20, FY21 and FY22 earnings forecasts for BAuto are lowered by 22.4%, 33.8% and 18.5% respectively after imputing lower sales volume and overall margins. The group is supported by a healthy balance sheet with a net cash position of RM98.3 million or 8.5 sen per share, with projected dividend yields of 6.4% to 6.8% for FY20 and FY21. — Hong Leong Investment Bank Research, March 17

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