Bermaz Auto Berhad (“BAuto”) Group is the sole distributor of Mazda vehicles and spare parts in Malaysia and Philippines. As at 11 October 2019, the Group has a market capitalisation of approximately RM2.55 billion. In this article, we will take a closer look at the business, management and financial aspects of the Group, to see if it is worth an investment.
BAuto’s origins started when its wholly owned subsidiary, Bermaz Motor Sdn Bhd, entered into a Distribution Agreement with Mazda Motor Corporation (“Mazda Japan”) on 28 February 2008, to distribute specific models of Mazda Completely Built-Up (“CBU”) vehicles, spare parts, accessories and tools in Malaysia.
Today, the Group’s activities in Malaysia have expanded to also include the provision of after-sales services for Mazda vehicles in Malaysia. As at 30 April 2018, BAuto owns ten 3S (“sales, spare parts and after-sales services”) centres and 1 flagship Body & Paint Repair centre. The Group also has 73 centres operated by appointed third party dealers nationwide.
BAuto ventured into the Philippines market when its 60.4% subsidiary, Bermaz Auto Philippines Inc. (“BAP”), signed a Distribution Agreement with Mazda Japan on 12 September 2012. As at 30 April 2018, BAP has twenty 3S centres operated by third party dealers.
Mazda Malaysia Sdn Bhd (“MMSB”) is a 30% associated company of Bermaz Motor Sdn Bhd, with the remaining 70% equity interest held by Mazda Japan. MMSB was established under a joint-venture agreement whereby Mazda Japan will provide assembly and technical expertise to MMSB’s operations in rolling out Completely Knock Down (“CKD”) models. MMSB is principally involved in the local assembly of Mazda vehicles by a third-party contact assembler, Inokom Corporation Sdn Bhd (“Inokom”), using local parts and imported Mazda supplied parts.
On 1 December 2014, BAuto acquired 20% equity interest in Inokom, followed by additional acquisitions of 4% and 5% equity interest on 25 February 2015 and 26 January 2016 respectively. Inokom is now a 29% owned associated company of the Group.
Comments: The Group appears to adopt an asset light business model with minimal capital expenditure, since the operations of assembly of vehicles are undertaken by its associates. That said, as the sole distributor for Mazda vehicles in Malaysia and Philippines, the Group is solely dependent on the relationship with Mazda Japan for continuous business.
Source: Hong Leong Investment Bank research report 14 November 2018
Vehicle sales is probably the best way gauge the pulse of this business. However, we were disappointed to find that BAuto does not disclose vehicle sales in a transparent manner till the 2018 annual report. In fact, we had to do a bit of digging to extract the vehicle sales data above from a Hong Leong Invest Bank research report of 14 November 2018.
Comments: In spite of the challenging automotive landscape, BAuto has shown positive growth in vehicle sales over the period of 2014 to 2018, whereby vehicles sales have increased from 11,780 units to 16,517 units. We believe the Philippines market has substantially larger potential than Malaysia market given the larger population size of 105 million (vs. Malaysian: 32 million) and lower car ownership per capital of only circa 3.8% (vs. Malaysia: circa 43.3%) (source: Wikipedia).
We extracted the following list of top 10 shareholders and list of substantial shareholders from the BAuto’s 2018 annual report (as at 13 July 2018).
The top 10 shareholders own 44.85% of BAuto’s shares. While institutional investors (such as the Employees Provident Fund Board) dominate the shareholding list, the largest shareholder of BAuto is Dynamic Milestone Sdn Bhd (“Dynamic Milestone”), with a 14.98% stake.
Comments: BAuto used to be called Berjaya Auto Berhad, and was a major subsidiary of Berjaya Corporation Berhad. There was a management buy-out via a special purpose vehicle named Dynamic Milestone in July 2016. The management of BAuto now owns 66% of Dynamic Milestone whereas Berjaya Corporation owns 33.3%. Following the management buy-out, the name change to BAuto was proposed, as its management emerged as controlling shareholders of the auto company.
Comments: BAuto is led by an experienced management team. Both Dato’ Sri Yeoh Choon San and Dato’ Lee Kok Chuan are also controlling shareholders of BAuto, via their interest in Dynamic Milestone. With “skin in the game”, we can have comfort that their interest is aligned with those of minority shareholders.
Measure 1: Growth in revenue
The automotive industry is highly cyclical. Consumers tend to restrict discretionary spending (especially on big ticket items such as cars) when there is a slowdown of economy and erosion of consumer’s purchasing power due to higher cost of living. Therefore, it is encouraging to discover that BAuto had achieved a CAGR of 8.26% in revenue for the past 5 years, growing from RM1.45 billion to RM1.99 billion.
Comments: Upon closer inspection, BAuto’s growth in Philippines is particularly robust with a CAGR of 31.28% in revenue from 2014 to 2018. Conversely, trading conditions in the Malaysian automotive market seems to be more competitive, as the Group only registered a CAGR of 3.63% during the same period. Expansion to Philippines has clearly been a good move as the larger geographical reach helps to reduce the Group’s reliance on a single market in Malaysia.
Measure 2: Growth in profits
Comments: To temper expectations, BAuto’s growth in profits is unfortunately not in tandem with its growth in revenue. One possible reason is the higher operation costs arising from the weaker Malaysian Ringgit against Japanese Yen as well as stiff competition from industry players. Currency volatility will affect profit margins as BAuto imports CKD kits and CBU models from Mazda Japan which are denominated in Japanese Yen. BAuto also suffers foreign currency risk through the earnings translation from its BAP operations.
The lower growth in profits can also be a sign of a competitive market where automotive players launch aggressive sales campaigns (such as discounts and rebates) to push for sales volume, eventually affecting the overall margin of all automotive companies, including BAuto.
Measure 3: Profitability
Comments: BAuto’s gross profit margins and net profit margin have remained
relatively stable over the years indicating proper cost controls. In addition,
return on equity ratios are well above 25% demonstrating that management is
efficient in allocating and converting every dollar of investor capital into
Measure 4: Liquidity
Comments: As investors, our preference is always for a conservatively managed balance sheet. BAuto delivers on that account with favourable current, cash and net gearing ratios for the past 5 years.
Round 5: Dividends payout
Comments: While the Group does not have a formal dividend policy, it has been consistently paying out dividends every year, as dividend payout ratios were in excess of 60% of profits, with the exception of 2014.
While we would not go as far as calling the Group as an income stock, due to the cyclical nature of the business, the presence of multiple institutional funds as shareholders lends to the view that the Group will continue to pay out a generous dividend payer.
With a closing share price of RM2.19 as at 11 October 2019, BAuto is trading at a price of earnings (PE) ratio of 9.77, with an indicative yield of 6.85%. At this valuation, the stock does not seem to be pricey and its yield is particularly attractive.