• Keep BUY with new MYR2.65 TP (from MYR3.05), 30% upside and 10% FY25F (Apr) yield. Bermaz Auto's 1HFY25 core earnings of MYR110m missed our and Street's expectations. Regardless, we think valuations remain attractive, with the stock trading at 8x CY25 P/E, below its historical mean of 9.1x. Its above-sector-average yield of 10% also remains a plus point.
• Disappointing quarter. 1HFY25 results missed our and Street's forecasts, making up 36% of full-year estimates. The deviation was mainly due to weaker-than-expected volumes sold. BAUTO declared a 2QFY25 DPS of 10 sen (including special DPS of 7 sen), bringing YTD DPS to 13.5 sen.
• Results highlights. 2QFY25 revenue fell 36% YoY (-24% QoQ) as sales volumes fell 41% YoY. The drop in sales was mainly due increased competition in the local auto market, especially among non-national marques, due to the influx of Chinese carmakers. Due to the less favourable sales mix, operating profit fell 49% YoY. As a result, 2QFY25 core net profit slipped 54% YoY, bringing 1HFY25 earnings to MYR110m (-42% YoY).
• Outlook. Management is cognisant of the challenging auto market due to the influx of Chinese carmakers. As heavy price discounting seems to be a popular strategy among the new entrants, we believe some consumers may postpone their purchases in anticipation of lower prices, and this would further destabilise the non-national marque segment. Regardless, we think BAUTO's volumes will still be mainly supported by its volume-heavy CKD models (CX5, CX30, and CX8), as well as the newly launched Kia Sportage. BAUTO's EV brands Xpeng and Deepal should also establish a stronger presence in the local EV market. However, we do not expect these EV marques to contribute significantly to BAUTO's overall sales volumes.
• Forecasts. We cut FY25, FY26, and FY27 earnings forecasts by 14%, 12%, and 10% as we lower our Mazda and KIA volume forecasts to better reflect its current sales performance in view of the intense competition, while we add Deepal's volume assumptions for FY26-27F. We also cut our FY25F DPS assumption to 20 sen from 23 sen, assuming a payout ratio of 88%.
• Our new TP is based on an unchanged 10x CY25F P/E with a 4% ESG premium. Given the share price correction (-13% YTD), we believe BAUTO is undervalued, as it is currently trading at 8x CY25F EPS, below its 9.1x historical mean. We believe BAUTO deserves a higher P/E considering the consistent new model launches in the pipeline, in addition to its above-sector-average dividend yield of 10%.
• Key downside risks include softer-than-expected orders and deliveries, and resurgent supply chain constraints.

Source: RHB Securities Research - 13 Dec 2024