Berjaya Auto Bhd (BAuto) is the sole distributor and retailer for Mazda vehicles in Malaysia and Philippines. We are initiating coverage on BAuto with an OUTPERFORM call at a target price (TP) of RM3.80 based on a targeted 13x FY16 PER which is broadly in line with industry peers. We like Bauto for investment merits backed by its: (i) superior growth prospect from low base (+21%-30% bottomline growth in FY15-FY16) on the back of strong pipeline of exciting models, (ii) sustainable FY15E-FY16E EBIT margins of 11.9%-12.0% on the back of favourable exchange rate (with huge exposure in Yen) as well as lower import duties, and (iii) potential dividend payout of 40% or 11.6 sen based on our FY16E NP of RM224.4m, which could translate into a c.3.5% dividend yield.

Strong sales momentum. Mazda vehicles sales in Malaysia have seen robust growth of 349% since FY2010, or a 4-year CAGR of 45.6% with sales volume increasing from 2,113 units in FY2010 to 9,497 units in FY2014. Concurrently, Mazda market share in non-national passenger vehicle segment has also expanded from 0.3% in 2008 to 3.7% currently based on July 14 data, on the back of overwhelming responses for its Mazda 3, Mazda 6 and Mazda CX-5. According to the data released by Malaysian Automotive Association (MAA), YTD July 2014 Total Industry Volume (TIV) for Mazda has already achieved 6,771 units, higher by 10% YoY compared to its YTD July 2013 volume of 6,152, representing 1.8% (+0.5ppts YoY) market share of Malaysia’s TIV.

Profitability 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 this bodes well for Bauto as its respective CBU models of <2.0litres from Japan are expected to provide c.25% contribution based on our FY15E and FY16E vehicle sales estimates. Meanwhile on the front of localisation programme, we believe that the effective excise duties for the upcoming CKD Mazda 3 and Mazda 6 models could also be reduced from 75% to 45% assuming a localisation rate of 40%. Currency-wise, BAuto is a major beneficiary of the weak JPY as the bulk of the group’s total purchases of Mazda CBU vehicles, CKD packs, spare parts, accessories and tools, are exposed to fluctuations in Yen. We estimate these portions to be at 50% of total cost in FY15E. Based on our sensitivity analysis, every 1% fluctuation in the JPY will impact FY15E-FY16E NPs by 5-7%.

Strong growth prospects with decent dividend yields. We are projecting FY15E/FY16E NPs of RM184.8m/RM224.4m mainly underpinned by both of its robust CBU and CKD vehicles sales (a 2-year CAGR of 30%, underpinned by the group’s upcoming attractive new model pipelines such as Mazda 2 in the B segment, CX-3 SUV and MX-5), with EBIT margin assumptions of 11.9%-12.0% on the back of favourable exchange rate as well as lower import duties. Note that our projections are 8.7%-10.7% lower than consensus’s FY15E-FY16E NPs forecasts. 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% going forward. Based on our free cash flow assumption of RM166.0m in FY16, we see the possibility for 40% DPR which is equivalent to a total RM89.8m dividend payment or 11.6 sen/share which is implying a 3.5% yield.

Initiate with an OUTPERFORM rating and a TP of RM3.80 based on a targeted 13x FY16 PER; a valuation which is broadly in line with peers. Note that we had started to cover BAuto in the space of retail coverage since the beginning of the year. From our very first Trading Buy call espoused in the retail research report (titled “In Top Gear”) dated 16th January 2014, BAuto has appreciated by c.99%. Even so, we still see a decent total upside potential of c.17%, on top of a 3.5% of expected net yield in FY16.

Source: Kenanga