Bermaz Auto’s Market Challenges and Future Prospects

Introduction

Date: Friday, 13 December 2024
Broker: UOB Kay Hian

Company Overview

Bermaz Auto, a prominent player in the automotive sector, engages in the distribution, assembling, retailing, and after-sales service provision of Mazda vehicles in Malaysia and the Philippines. The company has recently faced significant challenges, impacting its financial performance and market position.

Recent Financial Performance

Bermaz Auto’s financial results for the first half of fiscal year 2025 (1HFY25) have been disappointing, falling below market expectations. The company’s net profit after tax and minority interests (PATMI) for 2QFY25 was RM40.3 million, marking a substantial decline of 42.5% quarter-on-quarter and 55.2% year-on-year. This decline was primarily attributed to lower sales volumes in both Malaysia and the Philippines, as well as reduced contributions from associates.

Market Competition

The intense competition in the automotive market has been a major factor affecting Bermaz Auto’s performance. The surge of Chinese brands, such as Chery, in Malaysia’s passenger vehicle market has significantly impacted Mazda’s sales, reducing its market share. The competition is particularly fierce in the RM130,000-160,000 price range, where Chinese brands have gained considerable traction.

Dividend Announcement

Despite the challenges, Bermaz Auto has declared a second interim dividend of 3.00 sen per share for 1HFY25, compared to 5 sen per share in 2QFY24. This brings the total dividend payout for the first half of FY25 to 13.5 sen per share, including a special dividend of 7.00 sen per share announced in December 2024, translating to a yield of 6.6%.

Strategic Initiatives and Future Outlook

In response to the competitive pressures, Bermaz Auto is focusing on expanding its electric vehicle (EV) portfolio. The company recently launched the XPeng G6 and secured distributorship for Deepal, a brand under Changan Automobile. Bermaz Auto aims to sell 750 units of XPeng in FY25, with new bookings at 100 units per month. Deepal’s launch is expected in the third to fourth quarters of FY25.

Looking ahead, Bermaz Auto’s outlook remains challenging due to ongoing market competition. The company projects earnings for the second half of FY25 to range between RM100 million and RM110 million, reflecting a year-on-year decline of 31-37%. However, the introduction of new models and strategic initiatives such as competitive pricing and expanded marketing efforts are expected to support a gradual recovery in sales momentum.

Earnings Revision and Risks

The brokerage has revised its forecasts for Bermaz Auto’s FY25-27 earnings downward by 21%, 3%, and 2%, respectively, owing to lower vehicle sales volumes. Key downside risks include slower-than-expected sales recovery, intensified pricing pressure, and more cautious consumer sentiment amid increasing competition.

Valuation and Recommendation

Given the challenging market conditions, UOB Kay Hian has downgraded Bermaz Auto’s rating to “HOLD” with a revised target price of RM2.10, down from the previous RM2.90. The new target price is pegged to an 8.5x FY26F price-to-earnings (PE) ratio, reflecting Bermaz Auto’s five-year historical mean. Despite the downgrade, the company offers a dividend yield of 9.6%, with an expected payout of 80%.

Environmental, Social, and Governance (ESG) Updates

Environmental

Bermaz Auto is committed to energy efficiency and conservation, supporting the Republic Act 11285. The company is assessing the viability of installing solar energy systems at its headquarters and 3S centers.

Social

The company contributes to social causes through the Mazda Medicare Fund dialysis program, which channels 100% of its funds to charity.

Governance

Bermaz Auto complies with the Malaysian code on Corporate Governance, ensuring that independent directors comprise the majority of its board.

Conclusion

Bermaz Auto is navigating a challenging landscape marked by intensified competition and declining sales volumes. The company’s strategic focus on expanding its EV portfolio and introducing new models may help mitigate some of these challenges. However, the market’s competitive dynamics necessitate cautious optimism as Bermaz Auto strives to regain its footing and bolster its market position in the coming years.