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

Bermaz Auto Bhd
(Feb 17, RM1.92)
Maintain hold with a lower target price (TP) of RM1.99: After meeting Bermaz Auto Bhd’s (BAuto) management, we believe the worst is over for the company, given the car pricing issue in the first half of financial year 2020 has been resolved and breathtaking new models should fuel long-term sales prospects.

However, we foresee share price resistance because of potential headwinds from a more competitive sport utility vehicle (SUV) market and weaker consumer sentiments, despite the aforementioned positive drivers.

As such, our FY20 earnings forecasts for BAuto are cut, but FY21 to FY22 earnings estimates are raised 2% to 5% to reflect pent-up demand in the car sales volume. After our earnings revisions, our “hold” rating for BAuto is maintained with a lower TP of RM1.99 from RM2.06.

We are concerned about poor consumer sentiments due to a slowing global economy and fears concerning the Covid-19  outbreak, coupled with a stiffer SUV competition, which may continue to impact Mazda Malaysia sales volumes in the near term. Moving past this phase, we expect improving sales volumes from the fourth quarter of financial year 2020 (4QFY20), considering a rectified car pricing approval, new model launches and a healthy backlog.

Notwithstanding a blip in its 2QFY20 earnings before interest, taxes, depreciation and amortisation (Ebitda) margin, we reckoned BAuto’s Ebitda margins for FY21 and FY22 should normalise to 11% to 11.5%, given a higher margin product mix, a higher completely knocked down (CKD) participation and a growing contribution from after-sales service or parts.

Elsewhere, we expect BAuto’s 30%-owned Mazda Malaysia Sdn Bhd and 29%-owned Inokom Corp Sdn Bhd contributions to recover on a higher CKD CX-8 production volume. For the long term, BAuto is still eager to obtain a third SUV localisation programme and upgrade the Inokom production facility.

After our earnings revisions, our “hold” rating for BAuto is reaffirmed with a lower TP of RM1.99 from RM2.06, based on an unchanged 12 times 2020 estimated price-earnings ratio, making its valuation look fair, as we remain cautious about Mazda Malaysia’s near-term prospects.

A key upside risk is a higher-than-expected car sales volume. Downside risks are supply constraints for Mazda models, a delay in car pricing approvals and foreign exchange risks. — Affin Hwang Capital, Feb 17