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BAuto 1H deemed within expectations

Bermaz Auto Bhd
(Dec 6, RM2.07)
Maintain outperform with an unchanged target price (TP) of RM2.50:
We anticipate first half of financial year 2019 (1HFY19) profit after tax and minority interests (Patmi) to come in at about 63% of both our and consensus full-year estimates, buoyed by the stronger sales of Malaysian units of 8,132 (+65%), which we deem to be within expectations as we expect sales to normalise in 2HFY19.

Bermaz Auto Bhd (BAuto) recorded an all-time high for quarterly Malaysian sales in second quarter of FY19 (2QFY19) from the supply recovery after a constraint during the first two months of the zero-rated tax holiday.

We expect 2QFY19 Patmi of RM77.9 million (+55% quarter-on-quarter [q-o-q], +251% year-on-year [y-o-y]) buoyed by the all-time high for quarterly Malaysian sales in 2QFY19 at 4,802 units (+44% q-o-q, +89% y-o-y) mainly due to supply recovery of the all-new Mazda CX-5 model after a supply constraint (under 30%-owned associates, Mazda Malaysia Sdn Bhd during the first two months of the zero-rated tax holiday.

The 2QFY19 and 1HFY19 results are due to be released by mid-December 2018. Our assumption for the 2QFY19 Patmi is based on the vehicles’ average selling price for the past three quarters. This implied 1HFY19 Patmi of RM128.2 million (+202% y-o-y) is at about 63% of both our and consensus full-year estimates. We expect sales to normalise in 2HFY19 after the surge in delivery of the back-logged all-new CX-5. Note that, the group 1HFY19 sales of Malaysian units at 8,132 (+65%) is based on data from Malaysian Automotive Association.

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According to an announcement to Bursa Malaysia, BAuto has decided not to proceed with the proposed listing of the 60.4%-owned BAuto the Philippines due to the current challenging situation in the Philippines. Note that last year BAuto announced the deferment of the listing date to an unspecified date due to regulatory issues. We understand that the challenging situation in the Philippines is due to the implementation of the Tax Reform for Acceleration and Inclusion (TRAIN) law in January 2018. The TRAIN law has caused an increase in excise tax (up to 7%) and consequently, an increase in car prices, thus affecting the demand for motor vehicles in the Philippines. Nevertheless, BAuto plans to preserve its sales volumes by increasing its Philippine dealerships to 21 from the current 18 by the end of FY19 with a target to maintain its FY18 units sales level of about 5,000 units/year.

BAuto will maintain its zero-rated pricing for vehicles booked before Sept 1, 2018 (new sales and service tax implementation) and expects better sales in FY19 mainly from the all-new Mazda CX-5 CKD units (backlogged booking of 4,000 units), while supported by its other variants. For the calendar year 2018 (CY18), BAuto recently launched the face-lifted Mazda CX-3 and face-lifted Mazda 6 (CBU), while for CY19, BAuto is expected to introduce the new generation of its flagship models of Mazda 3 and all-new Mazda CX-8 CKD in 2HCY19.

Maintain “outperform” with an unchanged TP of RM2.50 based on 13 times CY19E (estimate) earnings per share, which is at an undemanding valuation of -1.0 standard deviation of its three-year forward historical mean price evaluation ratio compared with average net profit growth of 30% for the next two years. We like BAuto because for its: i) solid earnings recovery with the launch of its flagship model, the all-new Mazda CX-5; ii) superior margins, which is head and shoulders above industry peers (average profit margin of about 8% compared with its peers’ average at about. 2%); and iii) steady dividend yield at 7%. Risks to our call include lower-than-expected car sales volume and unfavourable foreign exchange. — Kenanga Research, Dec 6

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