Positive outlook for BAuto due to potential franchise expansion, says Maybank

MAYBANK Investment Bank Research puts a buy call on Bermaz Auto Bhd (BAuto) with a lower target price of MR1.65, based on the unchanged 14x FY22E price-to-earnings ratio (PER).

For its first quarter ended July 31, 2020 (1Q20), BAuto recorded a slight decline in revenue to RM448.8 mil compared to 1Q19’s RM535 mil, with earnings suffering a huge drop to RM9.2 mil from last year’s RM50.5 mil.

However, Maybank IB Research believes that the earnings setback is a ‘measured blip’.

“We remain positive over its operational and financial strength,” it said in a Sept 9 note.

Since the SST exempted all completely knocked down (CKD) models (100%) and completely built up (CBU) models (50%) from June 15 to Dec 31, 2020, BAuto experienced a persistent surge in orders.

Based on MAA statistics, Mazda’s vehicle sales have risen by 66% quarter-on-quarter (q-o-q) to 2,707 units in May – July 2020, averaging a positive 902 units per month.

This encouraging sales momentum has helped to lower its inventory holdings to two months, compared to the previous three to four months.

“We expect this strong sales trend to continue until Dec 2020, when the SST exemption ends,” it added.

While the SST exemption is a timely boost, BAuto and a majority of the other auto players are also further incentivising prospective buyers during this challenging period with attractive rebates to improve sales, impacting 1% to 3% of its margins.

“For that, we have lowered out FY21/FY22 earnings estimates for BAuto by 34%/16% on lower EBITDA margins,” Maybank continued, stating that the streets earnings estimate for BAuto are optimistic.

Additionally, BAuto aims to add another CKD model in Malaysia for a lower price tag to entice prospective buyers.

“With its recent cash conservation strategy, we do not rule out BAuto expanding its franchise beyond Mazda, as it aims to de-risk from its single franchise reliance,” it said.

As of 11.16pm yesterday, BAuto’s share price increased 1.42% to RM1.43 with a market capitalisation of RM1.66 bil. – Sept 16, 2020

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