- We re-affirm our high conviction BUY call on BAuto and raise our fair value to RM4.10/share from RM4.00/share.

- BAuto has acquired a 20% stake in Inokom for RM30mil -10% off parent company Berjaya Group and another 10% from Pesumal. The deal values Inokom at a forward PE of just 8x (FY16F earnings – YE June) vs. sector PE of 11x. Our forecasts are raised by 1%-2% over FY15F-17F to factor in contribution from Inokom.

- From a structural standpoint, the deal is a huge positive as it allows BAuto to better capture the growth in its manufacturing earnings. Firstly, contribution by Mazda to Inokom is expected to leapfrog over the next few years – from 40% to potentially 74% of total capacity by early CY16 (when the CX3 is launched). It would have been an opportunity loss if BAuto were not to capitalise on the earnings upward trend itself is catalysing. The deal effectively expands BAuto’s manufacturing earnings by 13%-19% over FY16F-17F.

- Secondly, the manufacturing unit gives BAuto its only exposure to export earnings – this is only captured by 30%-owned Mazda Malaysia (MMSB) and by extension, Inokom, which is the contract assembler for MMSB for both local CKD and export models. More than half of capacity for the CX5 is allocated for exports. The Mazda 6 should commence production by 4QCY15 with an estimated capacity of 7K-9K/annum (>50% for exports), while the CKD Mazda 3 should come onstream by Feb 2015.

- Thirdly, via Inokom, BAuto also rides on the earnings prospects of eight foreign brands that Inokom is assembling for. Inokom had just undergone a paintshop upgrade in Oct, which expands total capacity from 30K/annum to an estimated 50K/annum. If MMSB’s plans to construct its own paintshop (in Inokom) materialised, capacity can be expanded by another 60% to 80K/annum.

- BAuto’s balance sheet has been underutilised with a net cash of RM195mil (accounting for 10% of market cap). This deal only accounts for 15% of its net cash hoard, which leaves room for further expansion over the next 12 months.

- BAuto remains our top sector pick – this deal provides an immediate-term earnings catalyst, and more importantly, improves earnings prospects given the expected strong growth in Mazda CKD volumes. As it is, we are already looking at a 23% 3-year EPS CAGR, without factoring in potential earnings uplift from the CX3. Market expectations are low with the stock trading at just 11x CY15F PE.

Source: AmeSecurities