Bermaz Auto (BAUTO)

[i4value]

The chart below shows the ROE of the dozen Bursa auto-related companies. You can see that Bermaz Auto (BAUTO) stood out well above the pack.



But there is a difference between a good company (strong fundamentals) and a good investment (one that can enable you to make money).

From a fundamental investment perspective, a good investment is one which is trading below its intrinsic value.

Well, I have not carried out an intrinsic valuation of BAUTO yet. But looking at the PE and PBV trends can give you some insights whether it is worth the trouble. You can see that the multiples today are actually near the historical lows while the ROE is near the historical highs. An investment worth a detailed look?

For more insights into the Bursa auto sector go to “Are there opportunities in the Bursa auto sector?”

[weijian]

Bermaz Auto's ROE looks "unbelievably" high and it probably means that it has a different funding structure/business model compared to the rest of the competitors in the Msian market. Is worth a closer look:

Asset
- As expected, this is an asset light business as it is mainly involved in the distribution and retail of passenger cars. As exclusive distributor of Mazda/Peugeot (non exclusive for Kia), it only operates <10% of the retail branches, probably all on leases. It's biggest balance sheet item is the car inventories (~60% of equity).

- As a portion of the business deals with the customer who buy the car, their receivables are pretty short at ~20days, compared to the amount of time it pays its suppliers (~45days). So customers are funding ~20-25days of business. After accounting for its inventory days ~60days, it equates to a decent 30-35days CCC (cash conversion cycle).

- It is about 12% geared with MTNs (medium term notes) and because it is asset light, it should be able to easily repay all of them. The MTN seem to be money it raised to tide over Covid-19 winter, as it had previously finished paying up its bank loans back in FY19.


Business
- Under the tutelage of Towkay Vincent Tan (of Berjaya fame), Bermaz took over Mazda distributionship from Cycle and Carriage Bintang in 2008 (itself held the franchise from 1983). There has probably been a renaissance for Mazda on the local car passenger market as a result of this change in partnership? CBU cars were not competitive in terms of pricing and so in 2013, Bermaz and Mazda Japan set up their own JV to assemble/outsource the assembly for CKD vehicles.

- The relationship with their principals Mazda and Kia are pretty sticky because Bermaz have JVs with the brand principals to setup local assembly plants (own assembly/outsource). These assembly operations are accounted for as associates, further reducing balance sheet size. About 40% of COGS is sourced from their associates selling cars to them.

- Over the last decade, the passenger car population has been boosted by steroids from the Msian Gov - From cheaper taxes after implementing GST in mid 2015, to a tax-free period as a result of abolishment of GST in 2018 and finally the ~3year free SST period to boost car consumption during/post covid 19.

- The Msian car market is probably saturated? It is also immensely competitive especially in the mid/low tier. Cyclicality can be seen as sales rise with new models that gain popularity (~3-5year cycle for minor/major facelift). Of course, competitors' new models that gain popularity in the same car segment will hit hard on Bermaz too. Are the new partnerships with Peugeot (exclusive) and Kia (non exclusive) since 2020 and 2021, going to make a difference?


Structure
- As an associate of Berjaya Group, it was paying out most of its earnings to parent post IPO in 2013. With the MBO (mgt buy out) in 2017, it continued to pay out most of its earnings. Mgt has alot of incentives to keep paying out dividends to foot its 400mil cash bill to Berjaya Group. The Mgt group continues to own ~15% of the company with GLCs (EPF/PNB/Amanah etc) owning ~23% of it.

[i4value]

The goal of a business is to generate returns to the shareholders. So an asset-light structure should be the ideal. Unfortunately for many Malaysian brick and mortar companies, this is challenging. Many in the property sector even think that more assets gives them strengths. The difficult economic situation over the past few years have shown the advantages of being asset light

[weijian]

The goal of a business is to generate returns to the shareholders. So an asset-light structure should be the ideal. 

I agree that the goal of a business is to generate returns to the shareholders...but it does not specify in what manner and to what shareholders.

Is it to allow the majority shareholder, coincidentally also its major supplier to get paid faster? Or the majority shareholder is also the major customer and pay up slower?

Is it to allow family members and associates to have a "career" there?

Is it to keep controlling all assets using OPM (other people's money)?

In addition, I would not necessarily say an "asset-light" structure been the ideal. Especially in Spore now where rents are rising, owning the PPE may not be a bad idea. It acts against a hedge against common idiocy of using the excess cash in the past, and the asset itself may actually be a life saver in a future crisis. So regardless of asset light or asset heavy, I think the "ideal structure" is the alignment of interest between the majority shareholder and that of the minorities.

Bermaz seems pretty aligned (and demonstrated through actions) by paying out most of earnings as dividends, first to parent Berjaya and then to the new Mgt owners. From an old The Edge report in 2017, the current executive chairman Tan Sri Dato Yeoh had led a team of 10 to do the MBO from his old boss Vincent Tan.

[specuvestor]

Agree that you lose control of the asset if you go asset-light, not to mention escalating rents and if your business depends on the locality of your factory, stores etc.

Many who went "asset light" 15 years ago when that was the in-word regretted the consequence that came 5-10 years later. But for banks etc where location might not matter as much through digitization it might make sense eg DBS sold Shenton Way HQ building.

Focusing on the Asset ignoring the Business might not be a good idea.

[weijian]

Many who went "asset light" 15 years ago when that was the in-word regretted the consequence that came 5-10 years later. But for banks etc where location might not matter as much through digitization it might make sense eg DBS sold Shenton Way HQ building.

Hi specuvestor,

Do you have examples of such? The only ones I know are those retailers which rent units in shopping centers but unless it is strata titled, none of those good location malls are for sale to individual retailers!

Off my head, I can only contrast between Cortina and TheHourGlass (THG) where the latter has been buying much of its non Sporean storefronts (esp Australia). As an example, Cortina's lease liabilities is ~5.1% of revenue (42mil/826mil FY23 revenue) vs THG 3.1% (35mil/1136mil FY23 revenue) and we should be expecting a wider gap in future periods. Of course, this is not apple to apple comparison as I did not account for the additional interest costs that THG is paying compared to Cortina which has much less borrowings.

For Msia, I guess there is abundant factory (existing or future) space. So all its 2S/3S centers (with 3S the majority of them) probably has ample light industrial supply. More landlords than marque tenants.

[i4value]

Think of a return measure called EBIT(1-t) / Total Capital Employed. Total Capital = Equity + Debt. Translated into management term, this meant reducing the assets. So to continue to generate high returns, mgt should not just to improve the EBIT but also reduce the Total Capital. This include reducing working capital including trying to increase credit terms and reducing inventory. You can see the logic of reducing fixed assets. So if you think that mgt goal is generating higher returns, an asset-light strategy in the context of using less Total Capital is the correct way to go.