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Monday, December 16, 2019

Bermaz Auto Berhad - Ready to Roll

Author: sectoranalyst | Publish date: Mon, 16 Dec 2019, 6:15 PM

KEY INVESTMENT HIGHLIGHTS
Price approval delays resolved, recovery from 3QFY20
Deliveries of CX8 commenced late Nov19, 700-800 bookings since launch vs. 250-300 units/month sales target
Exploring a third CKD model, one option could be a hybrid
BAuto’s balance sheet is underutilized - coupled with Inokom capacity expansion, is well positioned to explore mass market brands
Maintain BUY, TP trimmed slightly to RM2.70 given earnings revision to reflect weaker RM and weak 2QFY20

Price approval delays resolved. The delay in pricing approval was mainly given the stricter approval process now (compounded by the fact that BAuto submitted approvals for two models at the same time) as well as extended negotiations on the accompanying tax incentives for the two models. However, the issue with the pricing approvals has been fully resolved. We understand that incentives received were slightly better for the facelift CX5 (relative to the outgoing model), while the CX8 received a larger incentive package compared to the CX5.

Expect recovery from next quarter. Following resolution of the pricing approvals, deliveries for the facelift CX5 commenced in the final week of Oct19 (only a very small portion was captured in 2QFY20), while the CX8 saw maiden deliveries late Nov19. We expect this to reflect in a recovery in 3QFY20 earnings onwards. The CX8 entails total bookings of 700-800 units (since launch in Oct19) with around >300 units delivered to customers so far. This compares well against targeted monthly volumes of 250-300 units/month Meanwhile, the facelift CX5 entails outstanding bookings of 700 units.

Volume rebound should be accompanied by margin recovery. The margin contraction in BAuto’s recent 2QFY20 was due to a much larger sales mix of the pre-facelift CX5. Due to the price approval delay for the facelift variants (which forced BAuto to hold back sales of the facelift CX5), management decided to push out the pre-facelift models to the market instead to maintain sales volumes. We understand there is only 200 units of the pre-facelift CX5 left in stock (vs. a typical 700- 800units/month volumes for the CX5 model). We would expect to see the volume recovery from 3QFY20 onwards to be accompanied by a margin recovery. This should be further underpinned by an upward revision to CX5 pricing by RM2100-RM2700/unit from Jan20 onwards.

Increased higher margin domestic supply for MMSB. Associates too (which was also affected by the price approval delays) should see a rebound next quarter given resumption of supply for the domestic market which fetches much higher margins than exports; recall that MMSB’s 2QFY20 margins dropped drastically given lower domestic volumes. BAuto is targeting CX8 exports of 300-400 units/month with Thailand as the main market, other than the Philippines.

CX30 introduction. The CX30 is expected to be launched in CBU form in 3QFY20. Three variants are offered to the Malaysian market, priced between RM143K-RM173K. An initial batch of 169 units has been imported with half of this coming with ready bookings from customers. It is still uncertain at this stage if the CX30 will be locally assembled for the Malaysian market, but we note that Thailand has already received the principal’s approval to produce the CX30 at the AAT (Auto Alliance Thailand) plant.

New CKD, hybrid potential? The MX30 (available in hybrid variants, previewed at the latest Tokyo Motor Show) and CX30 are potential models that BAuto could locally assemble. From a strategic standpoint, BAuto is looking to fill up the gap in its model mix for price points between RM120K-RM140K. The gradual increase in CX5 pricing over the years has left a vacuum within these price points.

Capacity expansion. BAuto is looking to invest in incremental capacity at 30%-owned Inokom, which will see Inokom’s total capacity double to 80K/annum by Apr21 from 40Kunits/annum currently. Total capex is expected at RM200m but the bulk is expected to be funded by Inokom’s internal funds and borrowings. BAuto will occupy 50% of the enlarged Inokom capacity i.e. around 40K/annum, vs. 28K-30K/annum currently. The incremental capacity is expected to be filled up, partly, by BAuto’s 3rd CKD model.

Shouldn’t a strong balance sheet be put to work? Despite attractive dividend payouts, BAuto’s balance sheet remains underutilized. Although we forecast a dividend payout of >100% for FY20F, balance sheet remains in a solid net cash position. The capacity expansion at Inokom, coupled with BAuto’s huge war chest positions it well to undertake brand expansion, particularly to fill up the gap in BAuto’s model mix for the lower priced mass market segment, in our opinion. The cheapest Mazda model, the Mazda 2 for example, is priced at ~RM90K and is imported as CBU, which does not really position BAuto to compete effectively in the mass market segment. Furthermore, Mazda models in general, are positioned as premium Japanese models.

Forecast revision. Given the impact from the delays in price approval for the CX5 and CX8 in 2QFY20, as well as after conservatively imputing weaker Ringgit assumptions, we trim our FY20F/21F by 31%/9%. Our projections now assume the JPY(x100):MYR at RM3.90 (from RM3.70 previously). However, we re-iterate that the weakness arising from delays in price approval for the CX5 and CX8 is pretty much an exceptional event and earnings should see a recovery from 3QFY20 onwards.

Recommendation. Following the earnings revision and after rolling over our valuation base to FY21F (YE April), we trim our TP slightly to RM2.70/share (from RM2.85/share previously) though our BUY call on BAuto remains intact. From a valuation standpoint, BAuto is cheap at just 10x FY21F earnings while dividend yield of 8% is attractive. Net cash accounts for 12% of market cap (FY21F). Key catalysts: (1) Launch of the CX8, facelift CX5 and CX30 in 2QFY20-3QFY20 (2) Dividend outperformance (3) Over 50% increase in FY20F export volumes driven by the CX8 (4) Potential NAP incentives to drive CBU exports (5) Potential introduction of an all-new Mazda model in FY21F (6) Potential brand expansion riding on Inokom’s enlarged capacity and BAuto’s solid balance sheet.

Source: MIDF Research - 16 Dec 2019

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