Bermaz Auto Bhd
(March 14, RM2.31)
Maintain buy with a target price (TP) of RM3.38:  Bermaz Auto Bhd (BAuto) third quarter ending April for year 2019 (3QFY4/19) core net profit (CNP) of RM84 million (14% quarter-on-quarter (q-o-q), 107% year-on-year [y-o-y]) broke its highest quarterly record in 2QFY19. At 87% of our full-year, 9MFY19 results trumped our street-high expectations, prompting a lift in our FY19-21 earnings forecasts by 5%-11%, incorporating higher sales volume and margins. Rolling forward our valuations to FY20 (from FY19) but at a lower price earnings ration (PER) peg at 13 times (from 14.5 times; in line with our PER peg for Perodua, Toyota), our new TP is RM3.38 (7%). Backed by attractive yields of 8.7% in FY20E (estimate)(80% dividend payout ratio [DPR]).

BAuto’s previous high in yearly earnings was recorded in FY15 whereby CNP jumped 57% y-o-y to RM222 million. With 9MFY19 now at RM207 million (150% y-o-y), BAuto is on track to exceed its FY15 performance. Looking into 3QFY19 itself, the q-o-q strength and outperformance vis-a-vis our forecast came from the Malaysian ops whereby revenue grew 12% q-o-q on high delivery of its backlog. Coupled with solid associates contributions, these offset weakness at the Philippines operations. Net cash continued to pile up to RM451 million (12% q-o-q) with 9MFY19 dividend now at 10.8 sen (61% DPR; 3QFY19: 4.5 sen).

Mazda’s constant product refreshment will continue to drive sales for BAuto in both Malaysia and the Philippines. 3Q19 will see BAuto launching the brand new Mazda3 and CX-8 in Malaysia to further boost sales; the Philippines market is expected to see both models soon after. With 92,000 Mazda vehicles on Malaysian roads since 2009, BAuto is starting to reap the benefit of higher margins from its recurring after sales service and parts revenue. Contributing 8% to FY18 revenue, we expect this stream of recurring revenue to grow to 9% in FY19.

A simplified comparison of the current sales and services tax (SST) regime versus the old SST regime (before April 2015) shows price reduction for cars and better margins for auto players. Alongside (i) recent strength in the ringgit against japanese yen, growing contribution of (ii) recurring income and (ii) higher-value models (like CX-8, Mazda3) to BAuto, we believe 9MFY19’s 10.6% net margin (4.8 percentage points y-o-y) is here to stay; it could expand further beyond FY19. — Maybank IB Research, March 14