MIDF: Bermaz Auto’s acquisition of Berjaya Auto Alliance a positive move


BERMAZ Auto Bhd’s acquisition to control Berjaya Auto Alliance Sdn Bhd (BAASB) could improve the group’s earnings incrementally over the next one to two years.

MIDF Amanah Investment Bank Bhd (MIDF Research) analyst Hafriz Hezry said there is an estimated 1%-2% incremental earnings contribution over next two years from BAASB.

“As Bermaz played a lead role in BAASB’s operations even at its previous 20% stake, Berjaya’s exit should have minimal impact on its earnings expectation for BAASB, that is 1%-2% incremental earnings for Bermaz over the next one to two years.

“BAASB is involved in the asset-light distribution business (with zero exposure to capital expenditure-heavy assembly of Peugeot models, which is undertaken by Stellantis NV at its plant in Gurun, Kedah), hence our projection of a maiden profit within its first year of operations remains intact,” Hafriz said in a report yesterday.

Bermaz had acquired an additional 35% stake in BAASB for RM4.6 million, increasing its total stake to 55%.

The deal followed Berjaya Corp Bhd’s decision to divest its entire 51% stake in BAASB to existing BAASB shareholders after a strategic business streamlining at the group under its new leadership.

Hafriz said it was a “fair deal” and the stake acquisition was done based on BAASB’s net asset value of RM13 million as of April this year.

“The deal represents five times BAASB’s estimated financial year 2022 (FY22) earnings of RM2.5 million, a reasonably undemanding valuation from a price-to-earnings ratio (PER) perspective, relative to Bermaz’s 12 times FY22 PER.

“We gather that no further capital injection is required by BAASB beyond the RM12 million initial equity injection by shareholders,” he said.

The analyst said Bermaz would settle the RM4.6 million consideration for the acquisition via internally generated cash, which is 1.3% of Bermaz’s net cash of RM354 million as of its third quarter ended Jan 31, 2021 (3Q21).

“In its first two months of operations (ended Jan 21), BAASB already managed to turn in a small profit of RM200,000. We expect this to expand meaningfully over the coming quarters as the group progressively addresses legacy issues plaguing the Peugeot brand in Malaysia previously, such as elevated spare parts pricing and part shortages,” he said.

The investment bank maintained its ‘Buy’ call on Bermaz with an unchanged target price (TP) of RM1.70, pegging Bermaz to 16 times calendar year 2021 forecast earnings at one standard deviation above historical mean, given brand expansion-driven growth and a cyclical recovery in the auto sector.

“Pending its 4Q21 results due to be out next week, we see room for upside to our earnings projections from the recent Kia distributorship win and consolidation of BAASB’s earnings,” he said.

Meanwhile, RHB Investment Bank Bhd (RHB Research) also maintained its ‘Buy’ recommendation on Bermaz with a new TP of RM1.75 from RM1.70, reflecting a 21% upside.

RHB Research analyst Eddy Do Wey Qing said the acquisition will enable the group to be less reliant on the Mazda marque, while strengthening its product line-up and offerings.

“Near-term re-rating catalysts include the local assembly of the CX-30 SUV, which would allow for more competitive pricing and better margins,” he said in a note yesterday.

The investment bank is also positive on the extension of sales tax exemption to December 2021 in providing support to new vehicle sales in the group’s FY22 ending April 30, 2022.

It, however, lowered its FY22 and FY23 Mazda vehicle sales assumptions in Malaysia to 12,890 and 13,420 units respectively from 13,140 and 13,490 units, taking into account the lockdown that has halted the manufacturing for two weeks.

“We tweak our FY21 forecast (FY21F)-FY23F earnings by circa 2%-3% after factoring in contributions from Peugeot and Kia. Our forecasts for both are conservative at this juncture, as we believe that both marques require time to scale,” he added.