Among the key takeaways from our recent meeting with management are; (1) to secure third locally build (CKD) Mazda CX-30 by end-CY21, (2) expect margin improvement post-termination of 6+6 promotions, and (3) plans to distribute another marque beyond Mazda. We anticipate an improvement for its vehicle sales volume for its domestic operation spurred by sales tax exemption in place until 31 December 2020. However, the performance for Philippines operation is expected to remain weak in the near term due to soft demand during Covid-19 pandemic. We maintain our Neutral call on BAuto, with unchanged target price of RM1.46 based on 13x PER.

• To secure third CKD of CX-30 by end-CY21. To-date, CX-30 makes up about 40% of its total imported sales volume (CBU). We understand that BAuto has been given a green light from Mazda Japan to do the third CKD programme of CX-30 model in the Kulim assembly plant at the earliest on December 2021. We believe that this would improve its margin in the medium term. We understand that Inokom is currently looking to invest up to RM200m to expand its production capacity from 30k to 80k units per annum to cater for the new demand. Moving forward, it targets to produce around 3k-4k units for each CKD model per annum.
• Expect a margin recovery in 2H. We expect a margin recovery in 2H as management decides to discontinue the six years warranty and free maintenance (6+6) promotions for the domestic operation from 1 January 2021 onwards and revert back to 5+5. Meanwhile, we also expect a turnaround of its 30%-associate of Mazda Malaysia Sdn Bhd (MMSB) as sales volume picking up from both domestic and export markets.
• Looking to expand beyond Mazda. BAuto had recently announced that its 20%-owned associate, Berjaya Auto Alliance Sdn Bhd (BAASB) will be the sole distributor for Peugeot vehicles in Malaysia. We understand that management is also looking to franchise another marque for its future sustainable growth. It was reported that BAuto is a frontrunner for the Kia franchise. We believe marques expansion under BAuto’s arm will be a good contributor to its bottom-line moving forward.
• Dividend payout of >50% of PATAMI. BAuto is committed to deliver a dividend payout of more than 50% of PATAMI which translates into dividend yield of c.5- 6%. BAuto has been paying an average dividend payout of c.95% of PATAMI for the last five years. As at 31st October 2020, BAuto stands at a net cash position of RM226m.
• Challenging outlook in Philippines operation. Its Philippines’ operation (BAP) is expected to continue to be impacted by lower sales volume arising from the softened market as a direct impact from the Covid-19 pandemic. Nevertheless, we understand that this will be mitigated by its minimal operating overhead. Todate, BAP has ~900 units of inventory yet to be cleared off.

Source: PublicInvest Research - 16 Dec 2020