Investment Highlights

• We maintain BUY on Bermaz Auto (BAuto) with an unchanged fair value (FV) of RM3.29/share, based on an unrevised FY24F target P/E of 12x, at parity with its 5-year historical average. The neutral ESG rating of 3-star is unchanged.

• On 22nd November 2023, BAuto’s 55%-owned Bermaz Auto Alliance (BAA) ended its partnership with Stellantis N.V as a distributor for Peugeot in Malaysia. The termination of the distribution agreement will enable Stellantis to establish a new national sales company (NSC) in 1Q2024 as part of its strategy to tap into the ASEAN region.

• The role of BAuto as an exclusive distributor would be scaled down. Nonetheless, currently there is interest for BAuto to provide car-related services for Stellantis' NSC given BAuto's extensive resources and expertise. During the transition period, BAA will ensure that Peugeot customers' access to vehicle maintenance, parts, warranties and after-sales support remain uninterrupted.

• We view that there will be minimal FY24F financial impact from the distribution agreement termination in view of Peugeot's relatively small revenue contribution of 6% in FY22 and FY23. Despite the agreement termination, there will be no impairment of the balance sheet and BAuto's Peugeot 3S Centre in Glenmarie is expected to carry on its support service business as usual.

• BAuto's earnings are expected to soften slightly temporarily in FY25F, resulting from the non-renewal of the agreement. However, the anticipated pick-up in high-margin model sales for Mazda as well as its ancillary income from Bermaz Auto Parts could fill some of the earnings gap.

• Consequently, BAuto will no longer need to spend financially supporting its 22 Peugeot dealers. This implies that the group would incur lower cost, which will be positive amid the current uncertain macroeconomic backdrop. Furthermore, BAA faced challenges in Malaysia's highly competitive automotive industry, resulting in BAA lagging behind other subsidiaries.

• We are revising our FY24F Kia sales volume assumption downwards by 300 units to 1,500 units reflecting the expected lower demand from weaker consumer spending. On the other hand, we increased our Mazda FY24F sales assumption by 270 units to 18,560 units following the launch of uplifted models that would attract more consumers. All-in, no change to our FY24F earnings.

• With the strong sales visibility and earnings catalysts still intact, the group currently trades at a compelling FY24F P/E of 8x versus its 5-year average of 12x with an attractive FY24F dividend yield of 5%.

Source: AmInvest Research - 23 Nov 2023