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.
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
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
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
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.
An accountant by training, F.I.R.E 2030 is a student of value investing since 2012. She believes that successful investing requires discipline and patience. But with the right knowledge and temperament, ordinary investors can achieve extraordinary results. These articles are her journals on stocks and the investing journey toward financial freedom in 2030.