KUALA LUMPUR: CIMB Equities Research has downgraded Bermaz Auto Bhd from Add to Hold in view of the weaker earnings delivery and rising competition in the crowded sports utility vehicles (SUV) segment.

It said on Monday this was due to the impending entry of the new Toyota CHR in 1QCY18 and the ongoing competition from the Honda CR-V. 

“Although the stock offers an attractive CY18F yield of 6.1%, we see limited re-rating catalysts beyond the new CX5 model launch. 

“Successful new model launches and higher dividend payout are key upside risks, while weaker earnings delivery and lower dividend are key downside risks,” it said.

It lowered its target price from RM2.30 to RM2.06. Its last traded price was RM2.15.

CIMB Research said Bermaz’s revenue in 2QFY4/18 grew by 20.6% on-quarter, driven by higher sales volume across Malaysia (7.5%) and the Philippines (33%) from the newly-launched CX-5 model and higher demand for the premium CX-9 and MX-5 models in the Philippines. 

Overall, the group posted 10% on-quarter growth in 2QFY18 net profit to RM22.2mil. This is the first sequential EPS growth in the last six quarters, indicating signs of earnings recovery.
It declared a second interim DPS of 1.6 sen (vs 2.75 sen in 2QFY17), which esd below expectations.

For 1HFY18, Bermaz’s revenue fell 10.7% on-year due to lower sales volumes, particularly for the CX-5 run-out model and the ageing Mazda 2 model. 

However, this was offset by stronger sales volumes in the Philippines, which grew 16% on-year in 1H. 

Bermaz posted 41% on-year drop in its net profit on the back of lower revenue, margin contraction from more sales incentives provided for the CX-5 run-out model to clear the stock, and weaker contribution from associates.  

Bermaz’s 29% associate, Inokom  more than doubled its RM7.5mil pretax profit in 1HFY17 to RM15.7mil in 1HFY18, driven by higher utilisation for contract assembly partly due to the new CX-5 model.
 
Inokom’s 1HFY18 sales volume rose 15.6% on-year to reach 10,534 units. 

Bermaz’s 30% associate, Mazda Malaysia (MMSB) posted 32% drop in revenue due to a 35% decline in sales volume as it reduced production volume prior to the launch of CX-5 in October. 

As a result, MMSB reported a RM13mil pretax loss in 1HFY18.
       
“We lower our FY18-20F EPS by 11%-20% to account for lower earnings contribution from associates and lower production volume in Malaysia. We lower our FY18F volume growth forecast in Malaysia from 16% to 8%. 

“Moreover, we also cut the associate earnings contribution due to disappointing results from MMSB. 

“Nevertheless, we still expect Bermaz to show stronger earnings growth in 2HFY18, driven by sustained demand growth for CX-5 and stronger volumes in the Philippines,” it said.