Bermaz Auto Bhd
(June 13, RM2.49)
Maintain add with a higher target price (TP) of RM3.30: Bermaz Auto Bhd’s (BAuto) revenue in the fourth quarter of financial year ended April 30, 2019 (4QFY19) fell 31% quarter-on-quarter (q-o-q) due to lower sales volume (-35% q-o-q) following record sales delivery in 2QFY19 to 3QFY19, driven by the tax holiday period in Malaysia, supply constraints and implementation of the Tax Reform for Acceleration and Inclusion (Train) law in the Philippines.
Despite the lower sales delivery, earnings before interest, taxes, depreciation and amortisation margin expanded by 2.1 percentage points to 12.8% in 4QFY19, partly due to lower advertising and promotion expenses and dealer incentives in light of lower sales.
Revenue in FY19 grew by 25% year-on-year (y-o-y) due to stronger sales in Malaysia (47%), despite weaker sales in the Philippines (-38%) due to the Train law implemented on Jan 18. BAuto also benefitted from higher associates’ profit contribution from 30%-owned Mazda Malaysia Sdn Bhd (MMSB). MMSB posted RM183 million pre-tax profit in FY19 (versus RM55 million in FY18) driven by higher production volume for CX-5.
Overall, BAuto delivered a record-breaking RM265.3 million net profit in FY19 on the back of an impressive 90% y-o-y earnings growth, which trumped our and Bloomberg consensus expectations.
We raise our forecasted FY20 (FY20F) to FY21F earnings per share by 15% to 17% to reflect higher margin expansion due to better cost control from lower advertising and promotion expense and stronger contribution from MMSB. We project MMSB to deliver sales volume of 25,000 units in FY20F and 30,000 in FY21F on the back of higher demand for sport utility vehicles (SUV) and potential new completely knocked-down localisation projects targeting Malaysian and export markets.
We expect the group to deliver 5% volume growth in FY20F, driven by new model launches such as Mazda 3, CX-8, CX-30 and a new facelift model for CX-5 that will include a 2cc turbo variant in Malaysia in the second half of 2019. Moreover, the group is cautiously optimistic about higher sales delivery in the Philippines, driven by new models.
Maintain “add” with a higher TP, still based on 14 times forecasted 2020 price-earnings (PE), in line with the target sector PE. BAuto is our top sector pick due to its robust growth prospects, driven by multiple new model launches, proxy to export growth and attractive 8.2% forecasted 2019 yield. Rising competition in the SUV segment, weaker earnings delivery and lower dividend payout are key downside risks to our call. — CGSCIMB Research, June 12