Berjaya Group Bhd (BGroup), a substantial shareholder of Berjaya Auto (BAuto), announced that it had entered into a MoU with key management of BAuto (BAuto Management) on the proposed disposal-cum-injection of up to an aggregate of 31.88% equity interest in BAuto into a special purpose vehicle (SPV) for a total consideration of RM766.75m or at RM2.10 per BAuto share. Essentially, it is a management buyout and we view this positively as it would dilute BGroup’s interest in BAuto and also suggest higher dividend payout by BAuto in the future. Our Outperform call on BAuto is maintained at a target price of RM2.58 pegged to 13x FY17F.

• Details of the SPV. BAuto management will inject up to 114.5m shares amounting to RM240.5m at RM2.10 per BAuto share, translating to 10% equity in BAuto into a SPV. In return, the SPV will issue 240.5m new shares at RM1.00 par value to BAuto management, which represents a 66.7%-stake in the SPV. In addition, Berjaya Group will dispose its entire 21.9% stake in BAuto (250.6m shares) for RM526.3m or at RM2.10 per BAuto shares to the SPV. This proposed disposal will be satisfied via the issuance of 120.25m shares at RM1.00 par value, representing 33.3% stake in the SPV. The balance of RM406.01m will be satisfied in cash. Hence the SPV is expected to finance the cash consideration with bank borrowings. Upon completion, the SPV will own up to 31.9%-stake in BAuto.
• Our take. We view this positively as we expect BAuto to distribute a higher dividend payout to its shareholders to help the SPV to repay the debt, amounting to RM406.0m. Currently, we assume a 40% payout ratio for FY16F and FY17F, which translates to a DPS of 7.1sen and 7.9sen for the respective years or a decent dividend yield of about 3.5%. We maintain our Outperform call at target price of RM2.58 pegged to 13x FY17F. We like BAuto for its asset light business model, sustainable profit margin, and attractive dividend payout.

Source: PublicInvest Research - 13 Apr 2016