Still zooming steadily. Mazda cars continues to gain popularity in the local Malaysian market thanks to its successful branding and marketing strategy, the “Zoom Zoom” campaign, followed by the introduction of Mazda’s SkyActiv technology as well as the effort by its experienced management team. All these, is evidenced from the MAA’s Total Industry Volume data which have seen Mazda market share in non-national passenger vehicle segment expanding from 0.3% in 2008 to now 3.8% based on Apr14 data, on the back of overwhelming responses for its Mazda 3, Mazda 6 and Mazda CX5. Of noteworthy, the Mazda CX-5 is still running a waiting list of 5-6 months with c.2500 bookings. Coupled with the upcoming attractive new model pipeline for affordable Mazda 2 in B segment, CX-3 SUV, MX-5 and two undisclosed models, we believe all these should continue to give a boost to BAuto’s earnings momentum.

Margins to be sustained by lower import duties, higher localisation and favourable exchange rates. According to the Free Trade Arrangement with Japan, imported cars below 2.0 litres will enjoy lower import duties of 5% from 10% previously, starting from January 2014 and is expected to be zero by 2016. On that, we believe the group is well poised to benefit from this as its respective CBU models of <2.0litres from Japan are expected to be at c.25% contribution based on our FY15 vehicle sales estimates. On the front of localisation programme, we believe that the effective excise duties for upcoming CKD Mazda 3 and Mazda 6 models could also be reduced from 75% to 45% assuming a localisation rate of 40%. While the strong MYR vs. JPY is already in Berjaya Auto’s favour given that its CBU vehicles are all denominated in JPY, the group have also hedged for forex exposure at the rate of c.MYR3.20 vs JPY100 to protect against the adverse rates.

FY14 results beat expectations. Berjaya Auto (BAuto)’s 4Q14 core net profit (NP) came in at RM50.4m (+33% QoQ; 116% YoY), bringing its FY14 NP to a record high of RM141.9m (+180% YoY). The stronger-than expected results were a tad higher than our full-year projection and the consensus’ estimates by 29% and 14%, respectively, deviated by: (i) stronger-than-expected earnings contribution by its associate MMSB as well as (ii) higher-than-expected margin due to favourable MYR/JPY rates and better sales mix. Meanwhile on a closer look YoY, YTD core NP soared 179% mainly driven by: (i) stronger vehicle sales (+34% YoY to 11.8k units in total), (ii) higher EBIT margin of 11.5% (+4.5ppts) on lower import duties (from 10% to 5% from Jan 2014), favourable exchange rate and better product mix, and (iii) turnaround in its associate’s earnings. With this recently concluded FY14 results, BAuto has now achieved a 4-year NP CAGR of 75%.

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 c.RM101m in FY15, we see possibility for 40% DPR which is equivalent to total RM40m dividend payout or 8.7 sen/share based on our new FY15E NP of RM168m. All in, this could translate into a c.4% net yield.

Maintain TRADING BUY with a higher TP of RM2.82 (from RM1.92). Post-results, our FY15 earnings forecast has been revised upwards by 30% to account for: (i) higher revenue underpinned by stronger sales assumption following the group’s upcoming attractive new model pipelines as well as (ii) sustainable EBIT margin of 11.2% on the back of favourable exchange rate as well as lower import duties. All in, our target price has been nudged up to RM2.82 after we rolled over to FY15 with higher targeted PER of 13.0x (from 12.0x previously) to align with the industry peers’ valuation. Although the share price has appreciated by 35% since our TB rating (with previous TP of RM1.92) back in January 2014, we still see total upside potential of 28% on our new TP of RM2.82 and DPS assumption of 8.7 sen.

Source: Kenanga