News  In a Bursa announcement, Berjaya Auto (BJAUTO) announced that it has entered into separate share sale agreements with Berjaya Group and Perusal (M) to acquire 20m ordinary shares, representing 20% equity interest in Inokom Corporation Sdn Bhd (Inokom) for a total cash consideration of RM30m (or RM1.50/ share).

 The considerations for the acquisition will be funded entirely from internally generated funds of BJAUTO.

 Inokom is principally involved in the manufacturing and assembly of light commercial and passenger vehicles, and contract assembly of passenger vehicles. It is also the contract assembler for Mazda CKD models namely Mazda 3 and CX-5 in Malaysia. It recorded a core NP of RM9.2m in FYE June 2013.

Comments  Although the RM1.50/share valuation for Inokom appears to be stretched based on our back-of-theenvelope calculation, (Inokom's FY13 core NP of RM9.2m/100m share base = 9.2 sen/share) arriving at 16x FY13 PER of Inokom (which is c.23% premium of the industry's forward PER of 13x), we laud the management's move and are POSITVE on the deal as: (i) this allows the group to ride on Inokom's earnings uptrend which is benefitting from BJAUTO aggressive launches of its CKD models in Malaysia, with higher earnings contribution to BJAUTO's associate level (currently only contributes by MMSB), and (ii) wide exposure of 8 foreign brands that Inokom is assembling.

 Assuming a conservative 2-year CAGR of 5% from Inokom's FY13 Core NP of RM9.2m, which arrives at Inokom FY15 core NP of RM10.2m, this could contribute at least RM2m to the associate earnings of BJAUTO based on the 20%-stake in Inokom in FY15.

 Meanwhile, the balance-sheet impact is minimal as BJAUTO is still sitting on a huge net cash pile of RM229.1m. Post completion, we expect BJAUTO’s net gearing (cash) of -0.5x to be lower at -0.4x in FY15.

Outlook  BJAUTO's strong sales momentum in FY15E/FY16E (+35%/+20%) will be underpinned by the group’s Mazda 3 CKD (c.23%-28% of total group’s sales), CX-5 (c.41% of total group’s sales in FY15-FY16) and the group’s upcoming attractive new model in the pipelines such as Mazda 2 in the B segment (c.11% of total group’s sales in FY15-FY16), CX-3 SUV and MX-5.

 On the margin side, we expect it to be sustained and benefit from lower import duties from FTA with Japan, higher localisation and favourable exchange rates (with the huge exposure in Japanese Yen, which is currently on a weakening trend).

Forecast  Our NP forecasts for FY15E-FY16E are increased by 1%-2% to account for the associate earnings contribution by Inokom and balance sheet adjustment.

Rating Maintain OUTPERFORM

Valuation  Our TP has been increased marginally to RM3.82 (from RM3.80) based on a targeted 13x FY16 PER; a valuation which is broadly in line with peers.

Risks to Our Call Lower-than-expected vehicle sales.

Source: Kenanga