Bermaz Auto (Bauto) stock opinion January 2020

*Disclaimer: I am not a licensed financial advisor. The following is just my personal opinion of the stock. It is NOT a buy or sell suggestion.

I previously wrote about Bauto here, the reasons that I chose it as one of my very long term income stocks, why I bought it initially at RM2.21/share based on technical analysis and my plan should the stock price fall.

Well it had fallen a bit when I wrote that first review, it has fallen more since then and I think – and hope – that it will fall some more.

Wow, I actually used the taboo word ‘hope’. But yes, I do ‘hope’ that I can get more Bauto stocks at lower prices. As my purpose of investing in Bauto is to get the dividends for income and to reinvest and compound the dividends and I don’t plan on selling my shares anyway unless I find far better deals then falling prices is actually a good thing for me.

While hope is a bad think in investing – because it won’t move prices and may affect our judgment – a clear plan and a good analysis are pretty much black and white.

The monthly chart of Bauto shows that the stock is in a long term consolidation with prices trading between RM1.795 – RM2.470. At the moment, it appears that prices are moving down, potentially towards the previous lows of around RM1.795. Hence based on technical analysis, there is a probability that my hope will be realised.

Buying a perpetually falling stock is not exactly a smart idea though even for an income investor; or rather – especially for an income investor. While there are those that have made profits (so they claim) from perpetually falling stocks by capitalising on the increasing dividend yield and buying more shares as prices fall, I will not buy these kinds of stocks.

Why? Because stock prices rise and fall for a reason. And while yes, the Malaysian market is not as liquid as larger economies and is more prone to manipulations by institutional investors, to a large extent, the stock price does reflect the true value of the company. So if a stock is continuously losing 30% of its value every year, then it’s likely the underlying business isn’t doing so well.

I have written at length about my choice in Bauto in my first review so I will not be doing a repeat of it all. Here I will write about the reasons that I continue to hold my positions and why I am gradually adding to my positions.

No.1: I understand the business

I’m not a finance person and I don’t like complicated stuff. There isn’t a lot of businesses that I can understand in the first place or that I want to bother to understand. Bauto is something that I understood at first glance:

  1. Sell Mazda
  2. Service Mazda

Make money from these business activities.

Then from the profit, 40% is given to shareholders as dividends.

Of course, just understanding a business isn’t the best reason to invest in it. Continuing to hold a business you believe isn’t going to do well is almost as bad as not knowing your reason for doing something.

No.2: I believe it is a sustainable business

Of course I may be wrong. I am only able to comprehend the basic fundamental indicators. If a financial expert has reasons to believe that Bauto is fundamentally a poor investment choice, then I hope you may be kind enough to share with everyone in the comments below.

I don’t think that Mazda vehicles will run out of buyers anytime soon. Competition – definitely. Proton and Perodua are getting much better. I believe and hope that our national car makers will continue to grow and contribute to the country’s economy. But I don’t think Mazda, Honda, Toyota, Ford or any other car brands will run out of buyers. As long as the products are up to standard then there will always be a market.

The company is also working towards increasing contribution from after sales services which should help in buffering the effects of fluctuating sales. Everyone can feel the coming of a bear market even if we deny it or wish it to come later rather than sooner and a poor economic atmosphere means less car sales. Not great for car dealers. However, existing owners will continue to service their cars.

As long as the company has an income stream, it can continue to pay its dividends albeit maybe reduced.

No.3: It has a good average dividend yield

Bauto’s average dividend over the past 5 years is RM0.14 (0.1496 to be exact). If I could get an average of RM2.1, my dividend yield will be 6.6%. I’m hoping to get RM2 though for a 7% yield.

A bad economy will likely affect the dividend payout, but over time (bear markets typically last 2-3 years) and by reinvesting the dividends and compounding, the outcome should be good.

No. 4: The big boys are buying

I did mention this as one of the reasons I bought into Bauto at my initial price of RM2.21. It is also a reason that I am averaging my position cost as prices fall further now.

This is not a black and white assessment which is why it is only an additional reason after all the other reasons.

KWSP and KWAP have been buying into the stock in large amounts for a while now. Manipulations aside, institutional investors have very likely done their homework about the company that they are investing in. And it would be a team of experienced experts doing the due diligence rather than self taught individuals like myself.

These institutions that have to pay regular yearly dividends to their investors (which would be you and I and millions of Malaysians) would be looking for assets that could reliably help them achieve their goals – which just so happens to be in line with my goal of income investing. So if the experts think that it is a suitable business, selling at a suitable price with a suitable yield, then it just might be.

My plan

I am gradually adding my position around the RM2 price though I am conserving some cash to get in at lower prices.

From the latest chart it seems that there is a high probability prices might trade lower with the RM1.8 area being potential support. I will add more around there or earlier if prices make a rebound.

This is just my opinion as a simple income investor. My strategy and plan may or may not be suitable for you even if you are also an income investor. It is very likely is not suitable for short term traders.

I am on a journey to build a stock income portfolio. If you have suggestions of good dividend stocks or potential growth stocks on the Bursa Malaysia, I hope you can share your suggestions and trading/investing plans.

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