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 Bermaz Auto - Looking to Sustain Record FY19F Performance

INVESTMENT THESIS
New launches to sustain strong FY19F TIV in FY20F
Eyeing >50% FY20F export growth and 9% overall volume growth for manufacturing unit
Special dividends in the offing; current yield of 7% already attractive
Re-affirm BUY at unchanged TP of RM2.85

Price hike. After raising pricing for the new CX5 by RM2,000 in Jan18 BAuto will raise pricing for all its models by RM2,000 (including the CX5) effective Jan19. In return, consumers will be getting an extra 2 years of warranty and free servicing (from the original 3 years). This should be positive for margins but the impact is spread over the 5-year period as after sales service revenue is recognised based on periodic maintenance schedules of the vehicles. BAuto generates up to 50% margins on aftersales service vs. an estimated 30% gross margin on vehicle sales.

Bookings remain decent. Total outstanding bookings stand at 1500 units with 65%-70% of this comprising the CX5. Around 800 of the outstanding bookings came in the month of April. BAuto completed deliveries of bookings tied to its SST-rebate promo in Jan19. Volumes are expected to normalise from 4QFY19 onwards but with a marginal improvement in margins. Net cost of the SST-rebate is estimated at RM1000-1500/unit.

New launches to sustain strong FY19 TIV. BAuto expects to at least maintain FY19F TIV of 15K-16K units in FY20F. Despite the inflated base driven by the tax-holiday in Jun18-Aug18, volumes will be driven by a pipeline of new launches namely the all new CX8 in Oct19/Nov19, CX30 sometime in 2HFY20 and the Mazda 3 in Jun19. Key volume drivers will come from the CX8 and the CX30 if it is locally assembled. A CKD CX30 might cannibalise the CX5 to a certain extent if pricing can be brought lower than the expected CBU pricing of RM140K-RM145K.

Special dividends in the offing? Given sharply improved earnings driven by the new CX5 and an exceptional boost from the tax-holiday in FY19F, we think there is room for a special dividend that could lift payout above our current 80% assumption, which already implies attractive yields of 7%. This should be backed by a strong balance sheet (FY19F net cash: RM270m) and FY19F FCF yield of 9%. BAuto is an asset light cash cow with little further equity investments required for its 30%-owned manufacturing unit.

Goodies from NAP? The Malaysian Robotics & IoT Institute (MARii) has been taking feedbacks from industry players in regards to the upcoming NAP (National Automotive Policy) review. We understand that part of BAuto’s wish list is for incentives for CBU exports, which would predominantly revolve around some sort of duty reduction/discount. BAuto is currently Malaysia’s largest CBU exporter with an estimated 6987 export units as of 9MFY19 comprising of the CX5 model. Its 2nd export model, the CX8 is expected to commence from 2HFY20. If successful, this could be an earnings re-rating catalyst.

Source: MIDF Research - 25 Apr 2019
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