- We re-affirm our high conviction BUY on Berjaya Auto (BAuto) following the release of its strong 3QFY14 results. Our fair value is raised to RM2.50/share (from RM2.30/share previously) given the upward earnings revision in this report.

- BAuto’s 3Q14 results outperformed both our and consensus estimates. The group reported core earnings of RM38mil (+36% QoQ) for 3QFY14 (ex RM7mil one-off ESOS expenses), which brought 9M14 core earnings to RM91mil (+232% YTD). This accounted for 85% of our forecast and 96% of consensus.

- Based on our checks with management, the outperformance came mainly from better-than-expected margins derived from the CBU CX5 units brought in to address the supply shortage of the CKD variants. We raise our projections by 10%-18% over FY14-16F to factor this in, on top of lower docket pricing for the Mazda 6 CBU.

- Revenue was 21% higher QoQ, despite a flattish TIV growth. Average revenue per car increased due to:- (1) launch of the CBU Mazda 3; (2) sales of CBU CX5 2.5 litre to address supply shortage of CKD (2 litre) variants – group has delivered more than 300 CBU units in 3Q14 (out of 600 units imported); and (3) launch of the CBU Biante in early 3Q14.

- Operating margins (ex one-off ESOS expenses) improved to 13.5% from 12% in 2Q14 despite an increased proportion of CBU sales. This was driven by:- (1) full quarter impact of CBU Mazda 6 docket price reduction (secured towards end-2Q14); and (2) exceptionally favourable CBU cost for 2.5 litre CX5 from Mazda Japan as it was meant as stop-gap measure for the CKD CX5 supply issue.

- Meanwhile, MMSB expanded earnings despite lower production given a RM4mil retrospective rebate received from vendors and Mazda as a result of the weaker JPY. Vendors typically pass down any cost savings from currency movements to end-clients.

- We expect high margin CKD sales as a proportion of TIV to regain traction in FY15F. The CKD Mazda 3 is expected to be launched in Oct, and CKD Mazda 3 in January 2015. Meanwhile, the CKD CX5 should see a pick-up in production towards April as MMSB’s new trim & final shop (dedicated for Mazda production) commences operations, which will increase Jobs-per-Hour (JPH) to 7-8 from 5 currently, or a 40% increase in installed capacity. BAuto derives higher margins from CKD sales given the excise duty rebates that it receives from its EEV-qualified models and basic localisation rate of 40% that it has achieved.

Source: AmeSecurities