Share price doubled in less than a year. Since our very first Trading Buy call on Berjaya Auto (BAuto, titled “In Top Gear”) dated 16th January 2014 at RM1.68, the share price has doubled to RM3.34. This represents a stellar outperformance over the benchmark FBM Small Cap Index which only gained 16% over the same period.

Now under core coverage. Despite its impressive share price performance, we believe it is still not too late to accumulate BAuto, the sole distributor and retailer for Mazda vehicles in Malaysia and the Philippines with 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 translate into c.3.5% dividend yield. Thus, 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.

Strong sales momentum. Mazda vehicles sales in Malaysia have seen a 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 the non-national passenger vehicle segment has also expanded from 0.3% in 2008 to 3.7% based on July 14 data, on the back of overwhelming responses for its Mazda 3, Mazda 6 and Mazda CX-5. According to 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 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 the group is well positioned to benefit from this as its respective CBU models of <2.0 litres from Japan are expected to be at c.25% contribution based on our FY15E and FY16E vehicle sales estimates. Meanwhile, on the parts 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, as 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 50% of our total cost in FY15E. Based on our sensitivity analysis, every 1% fluctuations in the JPY will impact our FY15E-FY16E NP by 5-7%.

Strong growth prospects with decent dividend yields. We are projecting FY15E/FY16E NPs of RM184.8m/RM224.4m mainly underpinned by robust CBU and CKD vehicles sales (a 2-year CAGR of 30%, nderpinned by the group’s upcoming attractive new model pipelines such as Mazda2 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’ 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 total RM89.8m dividend payment or 11.6 sen/share which is implying 3.5% yield.

Source: Kenanga