Bermaz Auto Bhd (TP: RM2.71) – France or Croatia?

In a nutshell, the Group is the exclusive distributor and retailer of Mazda vehicles in Malaysia (Mys) and the Philippines (Php). The Group is also part owner of Inokom (29%) and Mazda Malaysia (MMSB) (30%).

Share Price

Since its market debut on 17 November 2013, the share price of Bermaz Auto Bhd (BAuto) has appreciated by approximately 107% (excluding cash dividends) against its first-day closing price. By any measure, this is a commendable performance. However, much of the price gain was attributable to the period prior to 2H 2015. A steep price decline ensued in 3Q 2015, after which it trades range-bound between RM1.86 – RM2.43. 

Revenue Breakdown by Country (RM ‘mil)
Revenue

Volume Breakdown by CountryVolume

ProfitabilityMargins

Based on its past financial performances, BAuto was humming along through FY4/15 because of the strong demand for its popular Mazda CX-5. Beyond that, sales volume and margins were noticeably compressed because of GST implementation and a drastic depreciation of the JPY/RM (no thanks to low crude oil prices in those periods). In short, consumer and business sentiments were negative. Other problems were the lack of new car models (i.e. old Mazda CX-5 in June ’13) and competition (e.g. Honda CRV facelift in Jan ’15). Sure enough the share price reflected these difficult operating conditions. 

Sales Volume by Models in MalaysiaModel Breakdown & Launches.bmp

Moving forward, I would argue that BAuto will perform well. FY4/19 should continue benefiting from the full year sales of the Mazda CX-5 launched in Oct ’17, as is typically the case for new launches (see the table above).

Also, I expect the JPY/RM to strengthen (or at least not weaken further). After all, JPY/RM is trading at below historical average (hopefully, regression to mean will kick in), crude oil prices are expected to sustain above USD70/bbl according to the EIA and the BN PH government efforts to reduce debt should instill confidence in our currency over time.

Now the question is how much would I be willing to pay for BAuto? What exactly am I buying? A share in BAuto is a stake in the following:

a) 100% of the distributorship business of Mazda vehicles in Malaysia.

b) 60.39% of the distributorship business of Mazda vehicles in the Philippines, through Bermaz Auto Philippines Inc (BAP). 

c) 30% of MMSB (the export arm)

d) 29% of Inokom (the assembly manufacturing arm)

e) Net cash

But let us handle the easy parts first. The net cash (i.e. cash minus borrowings) of the group is RM261.5m. The book value of the investment in affiliates (i.e. the stake in MMSB and Inokom) is RM133.6m. I am taking a shortcut here by assuming that this is the market value.

Alternatively, you can assume a multiple on BAuto’s FY4/18 associate income of RM21.4m. For example, a 10x P/E on RM21.4m implies that the stakes in MMSB and Inokom are worth RM214.0m. I might have undervalued MMSB since Mazda Japan (its 70% owner) is making Malaysia the regional export hub. MMSB exported ~15k units in FY4/18 on an existing production capacity of 34k units p.a. So, it appears that the Japanese has an important plan for MMSB. The last I heard, MMSB is trying to penetrate the Iranian market, which has a Total Industry Volume of more than 1m p.a.

Now, consider the historical information (see table below), which I have presented earlier. Note that the 5-year CAGRs of revenue were 7.8% and 56.6% for Malaysia and the Philippines operations respectively. The historical overall ROC values were trending down, but still high, which is not surprising as BAuto is in a growth phase. As I have mentioned, margins were partly compressed due to a weak RM. 

My estimates of revenue growth rates are fairly conservative, especially when compared to the 5-year CAGR.  I am ascribing initial higher rates due to the soon-to-be launched CX-8 in FY4/19, in addition to the full year recognition of CX-5 and CX-8 in FY4/19 and FY4/20 respectively.  Since Malaysia has a saturated automotive market, a 5% growth rat appears to be reasonable. I am also ascribing a 10% margin to the Malaysia operation because: 1) it is within the lower historical range and 2) the higher margin during FY4/14 – FY4/15 is due to a stronger RM on the back of crude oil prices > USD100/bbl, which is unlikely to happen any time soon.

I am more optimistic for the Philippines operation. After all, Philippines has a population of more than a 100m, with one of the youngest median age group within the region. An increasingly wealthy middle class should sustain long-term demand. Note that the margin of the Philippines operation is lower than the Malaysia operation because of the weakness in the JPY/Peso. Because it is also a relatively new  operation and its sales volume is lower, it has yet to achieve economies of scale. To allow for these conditions, I am assuming its margin will gradually increase to 10%, similar to the Malaysia operation.

FCFFReinvestment (defined as Net Capex + Change in Non-cash Working Capital) is basically the group’s after-tax operating income that is put back into the business for future growth. I expect BAuto to continue investing in existing and new sales, spare parts and after-sales services centers (1S, 2S and 3S), perhaps not so much in Malaysia (stagnant for the past few years, mostly on conversion to 3S centers), but definitely in the Philippines. Regardless, excluding acquisition of associates (purely strategic and non-recurring), the reinvestment need is fairly low, hence its asset light, cash rich business model. 

CapexBAuto has a strong Free Cash Flow (FCFF) generating ability. Applying a terminal growth rate of 1.0% and a discount rate of 8.4% result in a value of RM3,125.7m for both its Malaysia and Philippines operation.

The value of the Group is RM3,125.7m + RM261.5m + RM133.6m = RM3,520m. But we need to exclude the 39.61% minority interest in BAP to arrive at the equity value. I value the minority stake at a P/E of 25.0x on its FY17 earnings of RM13.8m. This is at a premium over BAuto’s 18.0x trailing P/E in view of the higher growth potential of BAP.

In conclusion, the equity value of BAuto is RM3,520.8m – RM373.5m = RM3,147.4m. This translates to RM2.71 per share. 

This marks my first entry. Admittedly, my approach might have been slightly more technical, but it does compel me to lay out my assumptions explicitly. Do let me know what you think I can improve on. I hope it is useful to some of you.

Last but not least, go les bleus!!!