Sales of new models potential catalyst for Bermaz’s earnings

This article first appeared in The Edge Financial Daily, on September 11, 2019.
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Bermaz Auto Bhd
(Sept 10, RM2.29)
Reiterate buy with a lower target price (TP) of RM2.85:
While we are expecting earnings to normalise this year as we believe it would be challenging for Bermaz Auto Bhd to replicate its financial year 2019 (FY19) performance which was supported by tax holidays, we find the stock still very attractive. Backed by solid margins, minimal capital expenditure and strong balance sheet (net cash position with zero borrowing), it should be able to deliver another round of strong dividend payout of about 90% (FY19: 93%). At the current price level, this translates into a lucrative dividend yield of 7-8%. Therefore, we believe the stock has a strong basis to trade at higher valuations given that it is currently trading at around 12 times its FY20 price earnings (PE), below its five-year mean of 14.5 times. On top of attractive dividend yield, our revised TP offers huge potential upside of 24%.

 
We are more conservative than consensus with our lower sales volumes estimates.

Potential catalyst is stronger-than-expected sales volume which will provide further upside to Bermaz. This could potentially come from stronger-than-expected sales performance of new models.

After revising our forecast and rolling forward our valuation to calendar year 2020 (CY20), our TP drops to RM2.85. That being said, we think the market may have already factored in the weak performance of 1QFY20 as the share price recorded month-on-month drop of about 10%. Our TP is pegged at 14.5 times CY20 PE which is equivalent to its five-year mean. We believe this is justified on the back of its solid balance sheet and strong dividend payout.

We believe the key risks are consumer sentiment and financing risks. Weak consumer sentiment and stringent lending policies may dampen sales in the auto sector and put pressure on sales growth. — AllianceDBS Research, Sept 10