The easing of lockdown and cheaper car prices from the temporary sales and service tax (SST) exemption should lift demand for Mazda cars.
Affin Hwang Investment Bank Bhd analyst Brian Yeoh said this would hasten earnings recovery for Bermaz Auto Bhd (BAuto) from the year ending April 30, 2021 (FY21).
“We believe BAuto will get over the hump in FY21,” Yeoh said in a recent research report.
He said cheaper price tag (lower by three to four per cent) from the SST exemption should revive demand for Mazda cars, and thus would see earnings improvement for the Malaysia operations.
“To sweeten the deal, BAuto is also doling out an extended warranty and service maintenance programme of six years from five year’s coverage previously.”
With the cheaper price tag and extended service maintenance, he estimated that Mazda car buyers who buy cars between June 15 and December 31 could enjoy an overall savings of up to six per cent.
Current bookings for Mazda cars have surged to about 1,400 units, above the average monthly sales volume of 1,100 units.
“Mazda sales have also recovered to 503 units in May 2020 (from zero in April 2020) as the relaxation of the Movement Control Order (MCO) has allowed operations and car registrations to resume gradually from May 5, 2020 onwards.”
The firm believes Mazda sales momentum would unlikely match the heydays during the seconds-quarter to third-quarter period last year of 1,500 units to 1,700 units, considering the challenging consumer environment may cap sales growth.
Yeoh said BAuto’s earnings before interest, taxes, depreciation, and amortisation (EBITDA) was likely to improve, albeit at a slower pace, underpinned by higher average selling price margin models, higher localisation rates to benefit from the customised incentives, and growing after sales services and parts revenue.
“However, we are concerned that the forex volatility of the yen and ringgit may negatively impact BAuto’s margins as forex hedging was kept to a minimum.”
Yeoh said new model launches of Mazda could be deferred to early 2021 as BAuto planned to pare down its existing inventory balance of 4,700 units as well as to take advantage of the Chinese New Year festive period.
“Management guided that the new model launches, the all-new CBU MX30, all-new CBU BT-50 and turbo-variant of the CKD CX-8 will be pushed back to early 2021.”
He said BAuto might also looking to solidify its presence in Malaysia by partnering or acquiring another distribution or dealership business.
Similarly, Affin Hwang expects contribution from BAuto associates to recover slowly since the Inokom plant and Mazda showrooms are back and running.
“Moving on, BAuto has big ambitions to grow – Inokom expansion plans are still intact, and the company is considering to expand its localisation programme with the locally assemble production for the CX-30 and CKD MX-30 projects.”
However, the firm is concerned that the weaker macro environment and softer margins may weigh on BAuto’s profitability.
“As such, we cut our FY21-23 earnings per share by 11 per cent to 23 per cent, with lower target price of RM1.50, and downgrade BAuto to Hold.”
Key risks to the call include higher or lower-than-expected car sales volume, supply constraint on Mazda models, and foreign exchange risks.
He said BAuto’s dividend payout was at risk, but yields were still decent.
The management, he addef, had guided for a lower 50 per cent payout ratio from its Malaysian operations earnings, compared to its five-year average dividend payout of 95 per cent of profit after tax and minority interest previously.
“BAuto intends to preserve cash to tidy its balance sheet as well as to fund its expansion plans. As such, we estimate dividends per share of five to seven sen, which implies dividend yields of three to five percent for FY21 to FY23.”
