INVESTMENT THESIS

• Mazda Japan making Malaysia its export hub

• Associate earnings set to double in next 2 years

• Price revisions should see margin uplift from 4QFY17

• Re-affirm BUY at unchanged TP of RM2.50. 8.6% dividend yield and 41% earnings CAGR over next 2 years is solid

Springboard to ASEAN. In an interview with a local daily, BAuto’s Executive Director Datuk Francis Lee, highlighted that Mazda Japan is making Malaysia one of its export hub and sees huge potential within ASEAN. Via 30% owned Mazda Malaysia Sdn Bhd (MMSB), the group targets to export the locally assembled CX5 to Cambodia, Indonesia and Myanmar in 2HCY17. MMSB also hopes to commence exporting to a Middle Eastern country next year, after FTAs are worked out at the G2G level to negotiate duty levels.

Associate earnings set to double. The move to expand its export market underpin our view of BAuto’s associate earnings contribution doubling by FY19F driven by commencement of exports to the whole of South East Asia by Aug17. Prior to this, MMSB only exported the CX5 to Thailand. On the back of exports expansion, MMSB expects export 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 (FYE April). This will give a massive boost to MMSB’s export volumes after having dwindled to 3,000 – 3,500 in FY17F. Other than benefitting via MMSB which is the direct exporter, BAuto also benefits via 29%-owned Inokom which contract assembles the model. All in, we estimate associate earnings contribution to group bottomline to expand from 8% in FY17F to 16% by FY19F.

Inclusion of Iran will further expand export numbers. Iran is also part of the agreement with Mazda Japan for BAuto’s export market expansion and this is a market with massive potential (See Report dated 1st Nov 2016) entailing just 9% vehicle penetration and 1.2m TIV/annum. The group is currently awaiting the outcome of G2G bilateral talks between Malaysia and Iran, especially on Iran’s high excise duties of ~70% for imported vehicles. A positive outcome of the talks should trigger significant upward revisions to our export projections as we have yet to factor in Iran exports in our numbers.

Price hikes to lift margins. Other than export market expansion, another key takeaway from the interview was the possibility of a further price hike for the new CX5, which we estimate at RM2,000-3,000 (See report dated 15th March 2017), on top of the RM2,500-3,000 across the board price hike implemented since Jan17. We have already factored in conservative domestic volume assumptions of 13.6k units for FY18F (vs. management’s target of ~14K-15K) given the price hikes but expect margins to improve as a result (See Exhibit 2). We forecast EBITDA margins to rise to 11%/12% in FY18F/19F from just 8% in FY17F. As a niche player focusing on higher segments, BAuto places priority on margins over volume.

Recommendation. From a valuation standpoint, BAuto is cheap at just 10.7x CY18F earnings, relative to historical sector PE of ~12x. Given a strong 41% earnings CAGR over the next 2 years, solid dividend yields and value unlocking from the listing of BAP, should in fact trade at a premium to the sector. Re-affirm our BUY call at a higher SOP-derived TP of RM2.50/share (form RM2.45/share) after rolling over our valuation base to CY18F, which better reflects the export market potential and key new launches this year.

Source: MIDF Research - 10 Apr 2017