Bermaz Auto Bhd
(Jan 3, RM2.22)
Maintain buy with an unchanged target price (TP) of RM2.85: We expect Bermaz Auto Bhd’s (BAuto) sales momentum to remain robust for financial year 2019 (FY19) to FY21 on continued demand for the Mazda CX-5 and new car model launches.

In the immediate term, we think popular demand for existing model line-ups, coupled with the backlog of 3,000 orders (against projected sales of 12,600 units for FY19) should sustain the sales volume for the second half of FY19 (2HFY19).

The expected launch of the all-new Mazda 3 (in mid-calendar year 2019 [CY19]), all-new M6 and all-new CX-8 (in 2HCY19) and the all-new CX-3 should push sales forward for FY20 to FY21.

We have learnt that the design language for the next generation CX-3 would be based on the Mazda 3 platform, which is bigger and more appealing.

We think the earnings before interest, taxes, depreciation and amortisation (Ebitda) margin should remain healthy, underpinned by higher completely knocked-down (CKD) participation and strengthening of the ringgit over the long term.

However, the Ebitda margin may soften for 2HFY19, in view of the temporary weakness in the ringgit (versus the yen). The continued downward trend of the ringgit versus the yen will adversely impact BAuto’s profitability as more than 30% of cost of goods sold is denominated in yen.

To protect its margins, we think BAuto may hike prices of Mazda cars in CY19. Recall that BAuto hiked prices of Mazda cars back in 2017 and 2018 due to unfavourable foreign exchange movements.

Notwithstanding the tax holiday boost in 2018, Mazda’s sales volume dipped by 22% after the 2017 price hike, in tandem with the performance of most auto players in 2017.

Despite that, we think the improved consumer sentiment or spending power and an upcoming replacement cycle would anchor more sales for BAuto.

Elsewhere, we believe the contribution from associates (30%-Mazda Malaysia Sdn Bhd and 29%-Inokom) will continue to grow on the back of a higher production volume for the CKD CX-5 to cater for both domestic and export markets in the Asean region.

Apart from the CX-5, BAuto plans to introduce more CKD variants, starting with the CX-8 (likely in FY20) to replace the M3 CKD assembly, keeping the Inokom plant busy moving forward. For 1HFY19, CKD variants made up 78% of the total sales volume (versus 68% for FY18).

We forecast a dividend payout of 60% over FY19 to FY21, implying a decent yield of 6%.

While already attractive, we think that there could be an upside to this, considering that: i) the positive free cash flow position in FY19 to FY21, thanks to its low capital expenditure requirement; and ii) its strong net cash position of RM403 million (or 35 sen per share).

BAuto’s dividend payout has been generous — 80% to 103% over the past three years. Currently, BAuto’s cumulative six months of FY19 dividend per share of 6.25 sen accounts for 50% of our FY19 forecast.

We have maintained our “buy” call, with an unchanged TP of RM2.85. At 10.6 times FY19 estimated price-earnings ratio/6% yield, valuations look attractive.

Key risks to our call include a lower-than-expected car sales volume, supply constraints on Mazda models and foreign exchange risk. — Affin Hwang Capital, Jan 3