Berjaya Auto Bhd (BAUTO) which will be listed on the Main market on 18th Nov 2013, is the distributor and retailer for Mazda vehicles with an expected market capitalisation of RM562m. We are projecting FY14E/FY15E net profit of RM65.8m/RM69.9m respectively (a 2-year CAGR of 17%) underpinned mainly by both its CBU and CKD vehicles sales (a 2-year CAGR of 8%) with GP margin assumptions of 13.2%-13.3% which is in line with its historical margin trend, which ranges from 13.1% to 14.5%. We are not assigning any ratings for BAUTO at this juncture as we have yet to initiate a formal coverage on the company. Nonetheless, we have derived an indicative TP for the stock at RM0.92 based on a FY15E PER of 11x, which is at a 15% discount (for its relatively smaller market cap and smaller market share in the local automotive market) of the current valuations of its closest competitors, Tan Chong Motor Holdings and UMW Holdings, both trading at an implied forward PER of c.13x.

Berjaya Auto Bhd, the distributor and retailer of Mazda vehicles, also provides after sales services for its Mazda vehicles. Meanwhile, it is also involved in: (i) the local assembly of Mazda CKD vehicles by third party contract assembler, Inokom, through its 30%-owned associated company, Mazda Malaysia Sdn Bhd (MMSB), (ii) the distribution of Mazda CKD vehicles through its 100%-owned wholly owned subsidiary, Bermaz, and (iii) export of Mazda locally assembled vehicle to Thailand. Currently, BAUTO distributes 10 Mazda vehicle models with a total of 24 variants to suit different market segments.

Mazda vehicles gaining traction in Malaysia. Mazda vehicles have proven to be resilient to the economic climate changes, whereby its sales in Malaysia have generally increased from 2008 to 2011. Unit-wise, BAUTO’s sales of Mazda vehicles in Malaysia have grown from 2,113 units in FY2010 to 8,142 units in FY2013. This represents an impressive growth of 285% since FY2010 or a 3-year CAGR of c.57%, mainly underpinned by continuous demand for its new vehicle models launches. According to the data released by Malaysian Automotive Association (MAA), YTD Sept 2013 Total Industry Volume (TIV) for Mazda has already achieved 7,460 units, higher by 71% YoY compared to its YTD Sept 2012 of 4,368, representing 1.5% (+0.5ppts YoY) market share of Malaysia’s TIV.

Established business relationship with Mazda Japan. BAUTO has a good collaboration and cordial working relationship with Mazda Japan which it has nurtured since 2008 when it was first awarded the distributorship of Mazda CBU vehicles in Malaysia. BAUTO’s business relationship with Mazda Japan has allowed it to have a good understanding and guidance on the latest or up-and-coming Mazda models to match local consumer preferences and trend. Mazda Japan has also given BAUTO a lot of business support and its successful milestones have also enables BAUTO to tap into its vast knowledge in the motor vehicle distribution and retail business.

Strong parentage support from the Berjaya Corporation (BCorp) group. BAUTO ultimate holding company, BCorp, is a well diversified conglomerate listed on the Main Market with business interest in various sectors. As a subsidiary of BCorp, BAUTO is able to leverage on BCorp’s well established businesses and presence in various economic sectors as part of its marketing strategy. Noteworthy, BAUTO has long-term partnerships with the BCorp group for its Customer Relationship Management programmes such that all Mazda owners are able to enjoy certain privileges at selected BCorp Group’s retail outlets, this would translate into higher value propositions for Mazda owners.

Our indicative TP of RM0.92 is based on FY15E PER of 11x, which is at a 15% discount (for its relatively smaller market cap and smaller market share in the local automotive market) of the current valuations of its closest competitors, Tan Chong Motor Holdings and UMW Holdings, both trading at an implied forward PER of c.13x. We are projecting FY14E/FY15E NP of RM65.8m/RM69.9m (a 2-year CAGR of 17%) underpinned mainly by both of its CBU and CKD vehicles, with GP margin assumption of 13.2%-13.3% (after taking into consideration the stiff competition among the car distributors) which is in line with the historical margin trend ranging between 13.1% to 14.5%. Our sales growth assumptions are derived from: (i) the Frost & Sullivan Malaysia vehicles TIV growth assumption of +3.8% and +3.9% in 2014 and 2015, (ii) market share assumption of 1.5% as of total TIV for both 2014 and 2015, and (iii) a 2-year CAGR of 5% in its Philippines vehicles sales. On the dividend side, while the group currently does not have any formal dividend policy, we understand that the group targets a dividend payout ratio (DPR) of 40% subject to the financial performance, gearing, capex, working capital requirements of the group. Based on our free cash flow assumption of RM53.3m in FY15, we see possibility for the payment of 40% DPR which is equivalent to total c.RM28m dividend payment or 3.3sen/share, implying a 4.7% yield based on the IPO price of RM0.70. 

Source: Kenanga