Solid earnings track records with 3-year Net Profit (NP) CAGR of 53%. Berjaya Auto (BAuto), the distributor and retailer of Mazda vehicles, has achieved a NP CAGR of 53% over the past three years. This was underpinned by the resilient Mazda vehicles sales in Malaysia, which grew from 2,113 units in FY10 to 8,142 units in FY13, representing an impressive growth of 285% or a 3-year CAGR of c.57% despite gyrations in economic conditions.

Still gaining traction. Mazda cars continue to gain popularity in the local Malaysian market thanks to its successful branding and “Zoom Zoom” marketing campaign, which was followed by the introduction of Mazda’s SkyActiv technology driven by the relentless and experienced management team. All these efforts are reflected in MAA’s Total Industry Volume data where Mazda market share in non-national passenger vehicle segment surged from only 0.3% in 2008 to 3.9% based on Nov 13 data, on the back of overwhelming demand for its Mazda 3, Mazda 6 and Mazda CX5 models.

To benefit from the Malaysia’s Energy Efficient Vehicles (EEV) programme. Of noteworthy, Mazda’s SkyActiv technology which encompasses innovations, mainly in cars’ engine, transmission and chassis has propelled Mazda’s vehicles to achieve higher fuel efficiency and environmental-friendly emission. From our channel checks, we understand that the SkyActiv technology could easily pre-qualify for the EEV-status. With expectations of a comprehensive set of potential fiscal incentives to be introduced to promote the set-up of assembly plants for EEV in Malaysia, we believe Mazda is well poised to benefit from the incremental excise duty rebates for its potential EEV qualified models, which in turn enable competitive pricing against other players.

30%-owned associate MMSB swung back to profit. Mazda Malaysia Sdn Bhd (MMSB) (started operations in Feb 2013), which is involved in the local assembly at third-party Inokom’s manufacturing facility and exports of Mazda vehicles, has already achieved breakeven with 1HFY14’s associate earnings of RM4.7m. We gather that MMSB intends to assemble more models (such as Mazda 3 and Mazda 6) by increasing its capacity to 20k units p.a. by 2015. We have projected MMSB’s earnings to hit RM9.3m and RM17.7m in FY14E and FY15E, accounting for 9% and 13% of BAuto’s NP in FY14E and FY15E.

Targeted dividend payout policy (DPR) of up to 40%. We understand that the group intended to adopt a DPR of up to 40% of its net profits. Based on our free cash flow assumption of RM91m in FY15, we see possibility for 40% DPR, which is equivalent to total RM51m dividend payout or 6.1sen per share based on our FY15E NP of RM128m. All in, this could translate into a c.4% net yield.

Trading Buy with a TP of RM1.92, based on a targeted 12x FY14 PER (which is at a 10% discount to the current valuation of its closest competitors). We are projecting FY14E/FY15E NP of RM102m/RM128m mainly underpinned by (i) both its CBU and CKD vehicles sales (a 2-year CAGR of 27%) with assumptions derived from our in-house Malaysia vehicles 2014 TIV growth assumption of +3.8% and Frost & Sullivan Malaysia 2015 TIV growth of 3.9% in 2015, (ii) market share assumption of 1.2%-1.3% as of total TIV for both 2014 and 2015, and (iii) a 2-year CAGR of 16% in its Philippines vehicles sales as well as the EBIT margin assumption at 9.0%-9.3% for FY14 and FY15. We also estimate the Group will reward shareholders with a 6.1 sen DPS for FY15, bringing its potential total return to 18% from here.

Source: Kenanaga