We maintain our BUY call and MYR2.65 TP (24% upside) after BAutoreported 1QFY16 earnings that were in line. We expect the strong Mazda product pipeline to help secure its market share gains going forward. The CX-3 SUV is a highly anticipated model scheduled for a November launch, while the introduction of the cleaner Euro 5 diesel fuel will enable Mazda to be at the forefront of the diesel revolution.

1QFY16 earnings in line. Berjaya Auto (BAuto) reported 1QFY16 (Apr) net profit of MYR52.2m, down 5.5% sequentially and 6.9% lower YoY. Although this only reached 22.8% of our FY16 earnings estimate, we consider the results to be in line with stronger sales in subsequent quarters that would be driven by new models and new variants. A first interim DPS of 2.25 sen was declared (1QFY15: 2 sen), equivalent to a 50% payout.

Volumes up, margins down. BAuto’s revenue for the quarter was flat YoY but rose 20.8% QoQ on the back of higher sales in both the domestic and Philippines markets. However, the sales mix was less favourable, with the increased volume recorded mainly from higher sales of the more competitively priced Mazda Motor Corp (Mazda) (7261 JP, NR) 2 and Mazda 3 models. EBITDA margin fell to 13.6% for the quarter under review, from 17.4% and 14.4% in 4QFY15 and 1QFY15 respectively. This was attributable to higher advertising and promotional expenses, in addition to some price discounting, given the intense competition in the market.

Forecasts and risks. No change to our forecasts. The highly anticipated CX-3 sports utility vehicle (SUV) and various diesel engine variants would increase the appeal of Mazda vehicles. BAuto has already hedged against the JPY at MYR3.15 till end-2015. A 10 sen change in JPY/MYR could affect group pretax profit by MYR3m-4m. Risks to our recommendation include: i) unfavourable forex trends, ii) supply chain disruption, and iii) weaker consumer spending.

BUY. We retain our BUY call on the stock and a TP of MYR2.65 derived from imputing a 12x target P/E. Our target P/E remains well within the historical valuation range (8-14x) for stocks in the sector. We acknowledge that risks for the sector have risen on the back of weak consumer sentiment and the sharp decline in the MYR. BAuto trades at undemanding valuations, offering a reasonable yield.

Source: RHB Research - 11 Sep 2015