Period

2Q16/6M16

Actual vs. Expectations

Within expectations. The group reported 2Q16 net profit (NP) of RM53.1m (-8 YoY; +2% QoQ), bringing 1H16 NP to RM105.3m (-7%) which made up 49% and 48% of our and the consensus’ full-year NP forecast respectively.

Dividends

Within expectations. A second interim single-tier dividend per share (DPS) of 2.50 sen was declared, bringing 1H16 DPS to 4.75sens which implies a 52% dividend payout ratio (DPR). We are expecting the group to pay a total DPS of 10.3sen (c.56% DPR) with higher DPR assumptions in the remaining quarters for FY16 (c.5% net dividend yield). Key Result

Highlights

YoY, 1H16 revenue grew by a marginal 4% despite the double-digit growth of vehicle sales volume seen in both Malaysia (+17% to 7.8k units) and Philippines (+24% to 2.3k 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 with its sales dominated by both of its competitively priced B and C segment’s flagship models namely Mazda2 and Mazda 3. However at the EBIT level (-6%), margin shrank by 1.4ppts to 13.2% owing mainly to higher advertising and promotion (A&P) expenses amid stiff competitive environment, unfavourable sales mix as well as lower associate earnings contribution in the 2Q16.

QoQ, 2Q16 revenue grew by 6% mainly driven by higher sale volume in Philippines operations (+28%) on the back of overwhelming demand for both Mazda3 and Mazda CX-5’s CKD models. Meanwhile, Malaysia’s operations saw its sales volume decreased by 4%. At the bottomline, despite the decent revenue growth, PATAMI inched up by 2% mainly dragged by lower associate earnings contribution (-62%) as a result of higher OpEx for 3S expansion, accident repair centres and forex losses.

Outlook

We see headwinds ahead for the overall automotive sector in 2016, in light of the rising cost of living which will dampen consumer spending on big ticket items such as cars. However, among all the automotive counters that we cover, we see Berjaya Auto to be the least affected with the macroeconomic headwinds to be buffered by: (i) its targeted customer base (middleincome 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.

Change to Forecasts

We leave our FY16E-FY17E earnings unchanged for now.

Rating

Maintain OUTPERFORM as we see undemanding valuation at this level (trading at a forward 10.0x FY17 PER, a steep 38% discount from the industry average forward PER of 16.0x).

Valuation

Our TP remained unchanged at RM2.63 based on an unchanged targeted PER of 12.4x, which is also at +0.5x above its 2-year average forward PER.

Risks to Our Call

Lower-than-expected vehicle sales.

Weakening of MYR vs JPY.

Source: Kenanga Research - 11 Dec 2015