INVESTMENT THESIS 

• Price revisions should see margin uplift from 4QFY17

• Earnings set to grow at a CAGR of 41% over next 2 years underpinned by new CX5 and CX9

• BAuto Philippines IPO brought forward; accelerates value unlocking and cash repatriation

• Re-affirm BUY at higher TP of RM2.50 (from RM2.45). 8.6% dividend yield is nothing less than solid

Re-affirm our BUY call on BAuto and raise our TP to RM2.50/share (from RM2.45/share previously) following a recent meeting with management. While we conservatively trim our forecasts (further details in report), we have rolled over our valuations to CY18F, which will reflect significant growth catalysts beyond the weak FY17F (FYE April).

Margin uplift from price revisions. From Jan17, BAuto raised pricing across the board by RM2,500 – RM3,000 (i.e. 2%-3% increase). This should work positively for margins from 4QFY17. Beyond this, pricing for the all new CX5 to be introduced in Sep17 will be raised by a further RM2,000-3,000. Reflecting the margin improvement, we forecast EBITDA margins to rise to 11%/12% in FY18F/19F from just 8% in FY17F.

Resuming growth trajectory. After a lull period in FY17F (i.e. flat volume growth for Philippines and an estimated 23% contraction for Malaysia) due to a confluence of factors i.e. lack of new models, supply constraint, strong JPY - volume growth is expected to reaccelerate in FY18F, underpinned by the new CX5 and CX9. BAuto is targeting FY18F Mazda TIV at around 15K (+29%yoy) (versus our conservative FY18F of 14K) while BAP targets sales of 5,500 units (+33%yoy) versus FY17F estimate of 4,150 units. Coupled with the margin uplift mentioned above, BAuto is set to register a solid earnings CAGR of 41% over the next 2 years.

Associate earnings set to double in FY18F driven by commencement of exports to the whole of South East Asia from Aug17. 30%-owned Mazda Malaysia expects exports volumes of the new CX5 at 14,000/annum for the 1st year, before rising by 50% to 21,000 in the second year i.e. FY19F. This will give a massive boost to MMSB’s export volumes after having dwindled to 3,000 – 3,500 in FY17F.

Accelerating cash repatriation. The listing of 60%-owned BAuto Philippines has been brought forward to Apr17 from a 2HCY17 target previously. The listing will unlock value - BAP is listing at 15x FY18F (vs. BAuto’s 11x) and will accelerate repatriation of cash form the Philippines to BAuto’s Malaysian shareholders. Total IPO offer for sale proceeds and dividends from BAP could bump up BAuto’s yields by an incremental ~3% from the base 5.3% (FY17F). Management is motivated to maximise dividends to pare down the debt they raised to buy out Berjaya’s stake in BAuto previously.

Source: MIDF Research - 14 Mar 2017