- We re-affirm our BUY call on BAuto and nudge our fair value higher to RM3.10/share (from RM3.00/share) after the release of sterling 4QFY14 results.

- The group reported core net profit of RM50mil (ex-RM2.3mil ESOS expense), which brought full-year core earnings to RM142mil (ex-RM9.6mil ESOS expense). This beats expectations, accounting for 111% of our FY14F and 113% of consensus.

- Key reason for outperformance: (1) Stronger than expected after-sales contribution at 5%-6% of sales (vs. our 3%) and stronger gross margins at 30% (vs. our 22%); (2) Stronger than expected earnings at 30%-owned MMSB – FY14’s RM12.4mil vs. our RM10mil previously; (3) Reduction in import duties to 5% (from 10%) from Jan 2014, which affected the Mazda 3, Mazda 6 and Biante CBU models. These models accounted for 35% of 4QFY14 Mazda volume.

- We raise FY15F and FY16F earnings by 13% and 6% to factor in:- (1) Lower import duties from 10% to 5% in FY15F and 0% thereafter, for selective CBU models; (2) A 3% cost/car reduction for BAP following incentives granted by Mazda Japan for the new Mazda 3, effective August 2015; (3) Higher after-sales assumption at 10% of sales from FY15F onwards, in line with guidance (from ~6% previously); and (4) A 14% increase in MMSB earnings given stronger than expected volume recovery for exports to Thailand.

- MMSB could almost double earnings achieved in FY14F given a recovery in CX5 production. CX5 exports is now running at 1,000/month from an average 600-700/month in 3Q-4QFY14. MMSB will also see cost savings from the stronger MYR. At the BAuto level, every 1% strengthening of the MYR vs. JPY improves earnings by 3.7% (FY15F).

- Meanwhile, contribution from after-sales is expected to more than double to 12% of revenue (from 5%) given the opening of 4 new 3S centres in FY15F (RM7mil capex) to tap the larger pool of Mazda cars in the market. This is a very profitable business with 30% gross margins, and is estimated to contribute to 14% of group FY15F gross profit.

- Sales momentum is gaining strength - wholesale volume of 2,200 units as of the first two months of 1QFY15 had already accounted for 83% of that achieved in 4QFY14.

- Our forecast is now 9%-20% above consensus (FY15-16F). Notably, consensus earnings has been gradually catching up – raised 19%-20% in the past week (mainly on margin revisions), signalling positive earnings momentum, which is a strong share price catalyst. Strong net cash position of RM186mil suggests room for acquisitive growth, in particular, in expanding the group’s exposure to its manufacturing division, which is experiencing strong volume uptrend. This is a wildcard which could be another strong catalyst.

Source: AmeSecurities