Bermaz Auto (BAUTO MK; HOLD; TP: MYR2.05) - Keeping up with times

Bermaz Auto (BAUTO MK; HOLD; TP: MYR2.05) - Keeping up with times

• Silver linings from associates. Contributions from 29%-owned MMSB and 30%-owned Inokom are set to double over the next two years with Malaysia earmarked as Mazda’s export hub to the ASEAN region given Mazda Motor Corporation’s global capacity constraints. Taking this and impact of a higher JPY/MYR into account, our FY18/19 earnings forecasts are lifted by 4%/6%. Correspondingly, our new TP is MYR2.05 (+5%), pegged on unchanged 12.5x CY18 EPS (-0.5SD). Maintain HOLD for 5+% yields.
• Doubling of associates’ earnings by FY19. Key changes in our assumptions for MMSB and Inokom came from Mazda Motor Corporation’s (7261 JP, Not Rated) intention to enable Malaysia as an export hub to the ASEAN region (Cambodia, Indonesia and Myanmar) and potentially one of the Middle Eastern countries pending free trade agreements at the government-to-government level. For this, we expect Inokom’s production volume to hit 29k/39k/43k units in CY17/18/19 (from 22k units in CY16), of which 15k/23k/28k units will be from Mazda (from 11k units in CY16). Strong production in MMSB and Inokom will sizeably increase earnings over the next 2 years.

• Raising our FY18/19 net profit forecasts by 4%/6%. Following our volume adjustments for both MMSB (the importer of CKD kits and assembler for Mazda) and Inokom (a contract assembler for Mazda among other marques such as BMW & Hyundai), we raise BAuto’s associates’ earnings for FY18/19 by 45%/95%. However, positives from this development will be partially offset by higher JPY-denominated costs at the group level as we expect a higher JPY100/MYR of 3.90 (from 3.85 previously).