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This article first appeared in The Edge Malaysia Weekly on February 10, 2020 - February 16, 2020

BERMAZ Auto Bhd, the sole distributor of Mazda vehicles in Malaysia, may have reported one of its worst quarters ever in terms of profitability. Yet, to the surprise of BAuto, most — if not all — sell-side analysts covering the stock appear unfazed.

Shares in BAuto have declined 12% since the company announced weaker results on Dec 10, the selldown wiping out about RM300 million in market capitalisation over two months.

But Bloomberg data shows that analysts covering BAuto remain bullish on the stock, as 10 of them recommend a “buy”, while three others maintain “hold” calls (see table).

If they are right about their consensus 12-month target price of RM2.41, the stock has a potential upside of 29.6%, from its closing price of RM1.86 last Thursday.

BAuto CEO Datuk Francis Lee Kok Chuan concedes to feeling the heat, given the persistent strong “buy” calls and higher target prices.

“To be honest, we do feel a little bit of pressure because the expectations on us are very high. Frankly, my opinion is that some analysts are overly optimistic. But we can’t blame them, because they are not fully aware of our operations issue,” he tells The Edge in an interview.

BAuto’s net profit tumbled 72% y-o-y to RM20.39 million in the second quarter ended Oct 31, 2019 (2QFY2020), down from RM73.92 million, while revenue shrank 34% to RM457.17 million, from RM690.32 million.

For the six-month period ended Oct 31 (1HFY2020), BAuto’s net profit slid 42% y-o-y to RM70.9 million from RM123.2 million, while revenue fell 16% to RM992.21 million from RM1.18 billion.

The weaker quarter notwithstanding, the group recommended a second interim dividend of 2.75 sen a share — payable on Feb 17 — bringing the total dividend for 1HFY2020 to six sen.

“Our company continues to pay decent dividends. If we maintain such a pace, we should be able to pay 12 to 13 sen for the whole year, which could offer a dividend yield of 6% to 7%,” says Lee.


Pricing delay

Although the new facelifted CX-5, together with a new variant, was launched on Sept 30, followed by the all-new CX-8 model on Oct 1, Lee stresses delivery of some of the vehicles was delayed by certain pricing issues.

In fact, no CX-8 vehicles were sold during 2QFY2020.

It is learnt that automotive firms are required to get the government’s approval before officially pricing completely knocked down (CKD) models, as they need to apply for excise duty rebates and incentives.

“We had a pricing delay and, as a result, we were not able to capture the sales for 2QFY2020. Otherwise, we would have done better. The impact was quite significant because the CX-5 is our best-selling model. But it is what it is, we cannot change the situation; we can only learn from that,” he says.

Lee admits that 2QFY2020 was one of BAuto’s worst quarters, as it was stuck with old models and lower margins.

“We had a similar problem in 2015 and 2016, when we were running out of CX-5 too. Our profit margin was compressed because the dealers knew the new models were coming. So, we had to give them more incentives to sell our old models,” he says.

According to him, the worst is probably over for BAuto, as the company is expected to see the full impact from the sales of the new CX-5 and the CX-8 in coming quarters.

Lee, 60, was appointed to the board of BAuto in July 2011. He is also chairman of Bermaz Auto Philippines Inc (BAP) and a director of Mazda Malaysia Sdn Bhd and Inokom Corp Sdn Bhd.

Following a management buyout (MBO) in 2016, Berjaya Auto changed its name to Bermaz Auto, as it was no longer a major subsidiary of Berjaya Corp Bhd, the flagship company of prominent tycoon Tan Sri Vincent Tan Chee Yioun.

Datuk Seri Ben Yeoh Choon San — then CEO of BAuto — spearheaded the MBO by leading 10 senior management members, including Lee, in buying over a substantial stake from Berjaya Corp.

BAuto’s 29%-owned associate company, Inokom Corp, is a contract manufacturer for various marques, including Mazda, in Kulim, Kedah.

Meanwhile, Mazda Malaysia, which assembles Mazda vehicles locally, is a 30:70 joint venture between BAuto and its Japanese principal, Mazda Motor Corp (Mazda Japan).


New CKD project

Lee discloses that BAuto is currently negotiating with Mazda Japan for more CKD models to be produced at its Inokom plant in Kulim.

“CKD has been our bread-and-butter [business], as 75% of our cars are locally assembled. CKD is built in ringgit, so we are not exposed to the Japanese yen. With more CKD models, we should be able to mitigate the impact if the sales of one particular model are delayed.”

But there will be no new CKD project in FY2020, he says. “If anything, that would be FY2021. If we do, it will be another SUV [sport utility vehicle]. Ideally, if we can get the pricing right, it could be as big as the CX-5.

“We and Mazda Japan have always been discussing how to expand our plants and get more vendors involved in the business. The main concern is not enough volume to justify the investments. Manufacturing is all about volume. If you don’t have the volume, nobody is going to invest.”


Higher PER

Commenting on stock valuation, Lee says BAuto — currently trading at a historical price-earnings ratio of 10.23 times — deserves a higher PER.

“Being a growth stock, our PER is low. I have seen some industrial manufacturers fetching PER of 20 to 25 times. Fifteen times would be fairer, given that we have been showing good results and consistently paying good dividends over the years,” Lee says.

He adds that the major shareholders and management of BAuto still believe in its long-term prospects.

“BAuto is not just another typical automotive stock. We know what we are doing. We are always planning ahead for the next three to five years. There is value in our company.”

Lee observes that analysts like BAuto because its management has been very open and approachable.

“It is not the case that, when we do well, we talk to people, but when we are not doing well, we shut them out. We don’t mistreat the analysts and shareholders,” he says.

“People want to know why, if you are not doing well. If you explain to them, they will feel more confident. We don’t hide anything. People will ride with you because they know you will be back one day.”



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