Period

1Q16

Actual vs. Expectations

Within expectations. The group reported 1Q16 net profit (NP) of RM52.2m (-7 YoY; -6% QoQ) which made up 20% and 21% of our and the consensus’ full-year forecast, respectively.

Dividends

Within expectations. A first interim single-tier dividend per share (DPS) of 2.25 sen was declared, implying a 50% dividend payout ratio (DPR). We were previously expecting the group to pay a total DPS of 12.8 sen (c.56% DPR) with higher DPR assumptions in the remaining quarters for FY16 (c.6% net dividend yield). Key Result

Highlights

YoY, 1Q16 revenue marginally grew by 1% despite the double-digit growth of vehicle sales volume seen in both Malaysia (+17% to 4.0k units) and Philippines (+19% to 1.0k units) operations. This was mainly due to the different accounting treatment of revenue (whereby its sales is now recorded net of GST) coupled with the unfavourable mix of sales dominated by both of its competitively priced B and C segments’ flagship models namely Mazda2 and Mazda 3. We understand from the management that if the revenue treatment were to be standardised, 1Q16 revenue should see a growth of c.15% YoY. At the EBIT level (-5%), margin shrank by 0.8ppts to 13.3% owing to higher advertising and promotion (A&P) expenses amid a stiff competitive environment.

QoQ, 1Q16 revenue grew by 21% mainly driven by higher sales in both Mazda3 and Mazda CX-5 CKD models. We believe the decent revenue jump was also partly reflective of the normalisation post GST implementation as evidenced in the sudden surge in Mazda’s May TIV numbers (increased from 705 units sales in Apr15 to 1,155 units in May15; source: MAA). Despite the stellar revenue growth, PBT declined by 5% which we believe was dragged down by higher A&P activities as well as higher incentives given to dealers.

Outlook

Among all the automotive counters that we cover, we see Berjaya Auto to be the least affected by the macroeconomic headwinds being buffered by: (i) its targeted customer base (middle-income to high-income group which are less sensitive to the rising cost of living), (ii) relatively stable margins, benefitting from the lower import duties from FTA with Japan, and (iii) attractive new model such as CX-3 SUV and MX-5.

Nonetheless, adverse currency fluctuations i.e. weakening of MYR remained a key risk to the group’s earnings. Our sensitivity analysis suggests that for every 1% fluctuation of MYR vs 100 JPY from our previous base rate assumption of RM3.05/100 JPY will affect BJAuto’s FY16E bottomline by c.4%. Note that the group has a hedging position from September to December at RM3.15/100 JPY currently. (1Q at c.RM3.10/100 JPY). To mitigate this systematic risk, we also understand from the management that sales mix going forward will be more CKD-models-centric.

Change to Forecasts

Post-results, our FY16E NP is reduced by 20% to mainly account for our revised average MYR/100 JPY assumption of RM3.20/100 JPY (from RM3.05/100 JPY). Meanwhile, we have also introduced our FY17E NP with revenue growth assumption of c.14% and EBIT margin of 13.8%; on the back of new models introduction (new CKD models, facelifted models coupled with different fuel and transmission models.)

Rating

Maintain OUTPERFORM as we see value emerging at this level (trading at a forward 10.0x FY16 PER, a steep 21% discount from the industry average forward PER of 12.4x after the recent selldown).

Valuation

Post-results, we rollover our valuation base year from FY16E to FY17E. With a targeted PER of 12.4x (from previously 13.0x) which is the industry’s average forward PER, our TP has been reduced to RM2.63 (from RM3.14).

Risks to Our Call

Lower-than-expected vehicle sales.

Weakening of MYR vs JPY.

Source: Kenanga Research - 11 Sep 2015