- We reaffirm our BUY call on BAuto after a recent visit. Despite a cut in our FY15F EPS, we raise our fair value to RM4.50/share (from RM4.20/share previously) as we roll over our valuation base to CY16F earnings.

- 4QFY15 results are likely to be weak due to the industry-wide impact of the pre-GST freeze in purchases by dealers. Invoiced sales were higher (+25% QoQ), but was driven by the lower margin Mazda 2 which was recently launched, whereas throughput of underlying, higher margin models such as the CX5 and Mazda 6 were impacted by the delay in dealer purchases. Our FY15F earnings are trimmed 8% to reflect lower margins given the less favorable model mix, but FY16F-17F earnings remain intact.

- The issue is a mere blip (with the biggest hit in March when volumes fell to 800-900 units). April sales recovered strongly to 1,300 units and this momentum sustained in May. More importantly, it was driven by a recovery in higher margin models while Mazda 2 sales sustained at 300-400/month. A mix of higher absolute volumes driven by dealer inventory re-stocking and a higher proportion of higher margin models e.g. CX5, Biante, Mazda 6, Mazda 3 (from an estimated 60% in 4QFY15 to around 75% in Apr-May) should drive a strong bounce in 1QFY16 earnings.

- BAuto’s volume target for FY16F has been raised to 16K from 14K-15K previously, while at Berjaya Auto Philippines (BAP), targets were also raised to 5K from 4K. Key drivers are the Mazda 3 CKD, CX3 CBU as well as the new, lower variant CX5 CKD and a higher priced variant of the Mazda 2 (both of which were not in the plans previously). On top of this, a principal agreement has been reached with Mazda Japan to locally assemble the CX3, which will give a boost to FY17F earnings prospect.

- Our FY16F Mazda TIV is conservative at 14K for domestic and 4.4K for BAP, but as it is, we are already looking at a 30% EPS growth for FY16F, 13% higher than consensus and well outperforming sector growth of 13%.

- Associate contribution should turn positive going forward vs. an accounting loss in 3QFY15 given:- (1) Inokom’s plant upgrade for most of 3QFY15; and (2) units delivered by MMSB to BAuto towards end 3QFY15 were technically “unsold” until sales to end customers materialise. As throughput improves from dealer re-stocking and in the absence of plant shutdowns, associate contribution should normalise to account for ~10% of bottomline (FY16F) from 3% (9MFY15).

- Higher dividends are in the offing considering annual FCF of RM230-260mil and unutilised net cash of RM320mil. Even at our conservative FY16F 45% payout, yields are attractive at 4.3%. The concern on BAuto’s weak 4QFY15 is overdone – valuations have fallen to just 10x FY16F EPS.

Source: AmeSecurities Research - 10 Jun 2015