Berjaya Auto (BAuto) is a beneficiary of Japan’s policy to competitively devalue  the  JPY.  Every  10  sen  change  in  JPY/MYR  could  impact  net profit by about MYR5m.  Domestic Mazda sales are on track to meet ourFY15  sales  target  while  the  eagerly-anticipated  Mazda  2  B-segment competitor is on schedule for a Jan  2015 launch together with the CKD Mazda 3. Reiterate BUY with a revised TP of MYR4.50 (38.5% upside). 

Weaker  JPY  means  better  margins.  The  JPY  has  depreciated  5.8% against the MYR since mid-October, exacerbated by the Bank of Japan’s expanded  monetary  stimulus  programme  last  week.  We  estimate  a  10 sen  change  in  the  JPY/MYR  exchange  rate  could  impact  BAuto’s  net profit  by  MYR5m.  We  revised  our  JPY100/MYR  exchange  rate assumptions to MYR3.05 and MYR2.80 for FY15 and FY16 respectively (from MYR3.25), in line with our latest house exchange rate forecasts.

Weaker  JPY  also  means  more  competitive  vehicle  pricing.  The weaker  JPY  also  gives  BAuto  an  advantage  in  vehicle  pricing negotiations  as  Mazda  Motor  Corp  can  now  offer  more  competitive pricing to BAuto in MYR terms without sacrificing its profit margin.

New  model  launches  on  schedule.  BAuto  will  kick  off  2015  with  a bang,  introducing  both  the  Mazda  2  (assembled  in  Thailand)  and  the complete knock  down (CKD)  Mazda 3  next  January.  Other new Mazda models  in  the  pipeline  in  2015  include  the  facelift  Mazda  6  and  CX-5,before  the  debut  of  the  CX-3  baby  SUV  towards  end-2015.  We  are conservatively  forecasting  a  FY14-17  3-year  volume  sales  CAGR  of 38.2%, driven by a strong new model pipeline and a supportive principal.

Forecasts and risks.  We lift our FY15 and FY16 net profit forecasts  by 5%  and  15.3%  respectively  after  updating  our  JPY/MYR  assumptions. We also introduce our FY17 forecast. Key risks to our recommendation are:  i)  unfavorable  forex  trends,  ii)  supply  chain  disruption,  iii)  weaker consumer discretionary spending, and iv) irrational price competition.

Maintain BUY.  BAuto is attractive for its undemanding valuations of just 9.2x  FY16  coupled  with  a  3-year  FY14-17  EPS  CAGR  of  34.2%. Applying  a  PEG  of  0.4x  suggests  a  target  P/E  of  13.7x  (from  12.5x) applied  to  CY15  EPS  to  derive  a  revised  TP  of  MYR4.50  (from MYR3.60).  We  believe  Mazda’s  strong  product  suite  will  ensurecontinued market share gains. BAuto is in a net cash position and highly cash-generative,  which  could  mean  higher  dividends  or  new  earnings accretive business streams.

Another Leg Up Thanks To Abenomics
Weaker JPY means better margins.  Since mid-October,  the JPY has depreciated 5.8% against the MYR,  exacerbated by  the  Bank of Japan’s  unexpected  expanded monetary  stimulus  programme  last  week.  BAuto  will  benefit  from  a  lower  JPY exchange  rate  as  imported  complete  built  up  (CBU)  vehicles  from  Japan  and Thailand  are  transacted  in  JPY.  We  estimate  a  10  sen  change  in  the  JPY/MYR exchange  rate  could  impact  BAuto’s  net  profit  by  MYR5m.  We  revised  our JPY100/MYR exchange rate assumptions to MYR3.05 and MYR2.80 for FY15 and FY16  respectively  (from  MYR3.25),  in  line  with  our  latest  house  exchange  rate forecasts. As local assembly operations for Mazda vehicles in Malaysia are handled by  30%-owned  associate  Mazda  Malaysia,  BAuto’s  FX  exposure  is  limited  to  its equity interest. About 60% of  Mazda sales are CBU vehicles in FY15, declining  to 55% in FY16 as domestically-assembled volumes are ramped up. Weaker JPY also means more competitive vehicle pricing.  The weaker JPY also gives BAuto an advantage in vehicle pricing negotiations as Mazda Motor Corp cannow offer more competitive pricing to BAuto in MYR terms without sacrificing its profit margin.

New model launches on schedule. BAuto will kick off 2015 with a bang, introducing both the Mazda 2  (assembled in Thailand) and the CKD  Mazda 3  next January.  The Mazda  2  will  be  offered  in  both  hatchback  and  sedan  variants  with  prices  likely starting at MYR85,000, which  we think will be very competitive against class rivals given  the positive reviews and  head-turning looks. The CKD  Mazda 3  is expected to be  priced  from  MYR110,000  to  MYR120,000  depending  on  specifications, significantly  lower  than  the  current  MYR139,000  in  fully-imported  form.  Other  new Mazda models in the pipeline  in 2015 include the facelift  Mazda 6  and  CX-5  before the  debut  of  the  CX-3  baby  SUV  towards  end-2015.  We  are  conservatively forecasting a FY14-17 3-year volume sales CAGR of 38.2%, driven by a strong new model pipeline and a supportive principal.

Philippines  the  fastest-growing  auto  market  in  ASEAN.  The  Philippines  is  the best-performing  auto  market  in  ASEAN,  driven  by  a  strong  economy  and  growing middle class.  YTD total industry volume (TIV) for the nine  months to September has grown 29.2%  YoY  to 169,727 units. We believe  the Philippines’  Mazda sales are  on track to meet our FY15 forecast of 3,400 units.

Cash  rich  and  cash-generative.  BAuto  is  in  a  net  cash  position  to  the  tune  of MYR229m at end-1QFY15. We estimate that BAuto generates operating cash flow of over  MYR250m  per  annum.  Key  investments  going  forward  for  BAuto  include participation  in  the  Mazda  distribution  franchise  in  Indonesia,  a  new  paintshop  to eliminate  bottlenecks  at  the  Inokom  facility  in  addition  to  a  20%  equity  stake  in Inokom. We believe BAuto is still well-positioned to raise its quarterly dividend. A first interim DPS of 2 sen was declared in September.

Investment risks.  These include weaker consumer discretionary spending patterns, unfavourable forex fluctuations, a tighter financing environment,  and irrational  price competition in the marketplace leading to severe margin erosion.Forecasts. After updating our FX assumptions, we lift our FY15 and FY16 earnings forecasts  by  5.0%  and  15.3%  to  MYR224.0m  and  MYR284.2m  respectively. While the introduction of a smaller and cheaper Mazda 2 in January could affect its nominal average  margin  per  car,  we  believe  this  will  likely  be  offset  by  the  increase  in volumes and business scale, which should help to lift operating leverage. In addition, the annual 5% reduction in import duties for cars imported from Japan (0% by 2016) will  help  to  reduce  the  tax  burden.  Our  FY15-16  volume  forecasts  of  13,950  and 19,950 units for Malaysia are unchanged, rising to 25,150 units in FY17.

Investment case.  We continue to like  BAuto for its undemanding valuations of just 9.2x  FY16  coupled  with  a  3-year  FY14-17  EPS  CAGR  of  34.2%.  Applying  a conservative  PEG  of  0.4x  suggests  a  target  P/E  of  13.7x  (from  12.5x)  applied  to CY15 EPS to derive a revised TP of MYR4.50 (from MYR3.60). While the target P/E ascribed is a 5% premium to the largest stock in the sector by market capitalisation –UMW Holdings (UMWH MK, NEUTRAL TP: MYR12.40), we believe this is justified by virtue  of  its  stronger  earnings  growth  and  clarity  of  earnings.  We  believe  Mazda’s strong product suite will ensure  continued market share gains. BAuto is also  in a  net cash position and highly cash-generative, which could mean higher dividends or new earnings-accretive business streams.

Source: RHB