Bermaz Auto to keep momentum going

TheEdge Wed, Jan 16, 2019 02:00pm - 5 years View Original


BERMAZ Auto Bhd (BAuto) may have hit a speed hump recently in its efforts to spin off its business in the Philippines but the automotive firm remains unfazed as it has been doing exceptionally well in Malaysia.

According to newly promoted CEO Datuk Francis Lee Kok Chuan, his main task is to create long-term financial stability for the group by working closely with its Japanese principal, Mazda Motor Corp (Mazda Japan).

“Like it or not, the automotive sector has not been a favourable sector for most investors in recent years. But we want to make BAuto a consistent performer, not a cyclical stock that goes up and down. We hope BAuto can become a steady performer like Nestlé (M) Bhd,” he tells The Edge in his first interview since taking over the reins from Datuk Seri Ben Yeoh Choon San.

Lee, 59, was appointed to the board of BAuto in July 2011. He is also chairman of Bermaz Auto Philippines Inc (BAP) and a director in Mazda Malaysia Sdn Bhd and Inokom Corp Sdn Bhd.

Last Wednesday, BAuto told Bursa Malaysia that the group had promoted Lee from executive director effective Jan 1, whereas Yeoh had been redesignated as executive chairman.

Over the past 12 months, BAuto’s share price has been ranging between RM1.80 and RM2.44. The counter closed at RM2.22 last Thursday, giving it a market capitalisation of RM2.57 billion. Bloomberg data shows all 14 analysts covering BAuto recommending a “buy”, with a consensus 12-month target price of RM2.68.

While Lee acknowledges that BAuto’s share price has not been performing, he insists that the management is not under pressure to meet analysts’ expectations.

“To be honest, we don’t feel pressured at all. In terms of financial results, we have consistently outperformed. Our job now is to focus on our operations and keep the momentum going,” he says.

Lee adds that while the stock market is unpredictable, he believes that BAuto is undervalued by the market. “With the number of things that we have on our plate, the huge potential of our export market and given that Mazda Japan sees Malaysia as a springboard to Asean, our growth story is far from over,” he says confidently.

 

Philippines IPO called off

To recap, Berjaya Auto Bhd changed its name to BAuto after a management buyout (MBO) in 2016 as it was no longer a major subsidiary of Berjaya Corp Bhd, the flagship company of prominent tycoon Tan Sri Vincent Tan Chee Yioun.

Recall that Yeoh — then CEO of BAuto — spearheaded the MBO by leading 10 senior management members, including Lee, to buy over substantial stakes from Berjaya Corp.

Since the completion of the MBO, BAuto has been actively pursuing the spin-off listing of its 60.4%-owned BAP, which distributes completely built-up Mazda vehicles in the archipelagic state, on the Main Board of the Philippine Stock Exchange.

In fact, BAP’s listing application was submitted at end-2016, but the initial public offering (IPO) had been deferred to 2018 as the company needed to provide certain additional information required by the authorities.

Unfortunately, the challenging automotive market conditions in the Philippines eventually prompted BAuto to scrap its much-awaited IPO last November.

Commenting on this, Lee says car prices in the Philippines have gone up by 5% to 7% following the increase in vehicle excise tax, which will affect BAP’s sales projections for the coming years.

“We think the consumer sentiment in the Philippines is likely to remain negative for at least another 12 months. This may not be an opportune time to list the company. We will wait for a better timing,” he explains.

BAP registered a five-year vehicle sales compound annual growth rate of 51% between the financial year ended April 30, 2013 (FY2013), and FY2018, from 657 units to 5,202 units.

Vehicle sales in the Philippines, however, saw a sharp 40% year-on-year decline to 1,499 units in the second quarter ended Oct 31, 2018 (2QFY2019), compared with 2,501 units a year earlier (see Chart 1).

“FY2018 was a record-breaking year for us, because many people bought cars before the implementation of the vehicle excise tax. But given the present challenging environment, our vehicle sales projection for FY2019 is only 3,200 to 3,300 units,” Lee reveals.

Currently, BAP contributes 5% to 6% to BAuto’s net income. Lee says his immediate target is to sell 6,000 to 7,000 units a year in the Philippines by 2021 or 2022.

“If our volume can go up to 8,000 to 9,000 units, we should be making some decent money. By then, it [BAP] should be quite sizeable to list,” he says.

 

SST absorption bears fruit

At home, BAuto is the distributor of Mazda vehicles and spare parts. Its 29%-owned associate company, Inokom Corp, is a contract manufacturer for various marques, including Mazda, in Kulim, Kedah.

Meanwhile, Mazda Malaysia, which assembles Mazda vehicles here, is a 30:70 joint venture between BAuto and Mazda Japan.

It is worth noting that, BAuto recorded a more than threefold jump in net profit to RM73.92 million in 2QFY2019 on better sales during the June-to-August tax holiday and improved vehicle sales mix and profit margins.

For the cumulative six months (6MFY2019), net profit rose nearly threefold to RM124.2 million compared with RM42.41 million a year ago.

Lee highlights that BAuto’s impressive performance was mainly due to its scheme to absorb the Sales and Services Tax (SST) for those who had placed their orders before the reintroduction on Sept 1.

“Our [then] CEO Ben Yeoh made a good move in mid-July. We adopted a fantastic strategy to absorb the SST as long as you buy our cars before Aug 31. Basically, we took as many forward bookings as we could. Eventually, we got 6,000 to 7000 bookings, which would last us for about four to five months.”

He adds that BAuto was the first in the market to declare that it would absorb the tax, giving it an advantage over its competitors. “Not all car companies could absorb the SST because they were worried about their margins. But for us, we would rather have sales than no sales, even if our margin is reduced.”

Lee says BAuto had correctly predicted that the market would tank once the SST was implemented. “True enough, it did, but our sales shot up, because we had bookings. The volume of incremental sales was more than enough to offset our cost to absorb the SST.

“But to be honest, I am actually very surprised with our strong sales. We are very happy with what we have. Hopefully, we can capitalise on what we have achieved so far,” Lee says.

Moving forward, he says, Mazda’s car sales in Malaysia should remain strong as prices have dropped by 2% to 3% following the implementation of SST.

“Post-SST, our sales remained strong until December. We didn’t even have to give discounts like other car companies did. Although the car buyers knew they had to pay SST, they still bought because prices were still lower than they were during the GST regime,” he explains.

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