BAuto’s 1HFY16 (Apr) results missed expectations, reaching only 46% and 44% of our previous forecast and the consensus estimaterespectively. Despite offering a strong product suite and fresh modelline-up, the harsh operating environment and weak MYR will continue to work against importers. After cutting our forecasts, we trim our TP to MYR2.40 (from MYR2.65, 13% upside) but keep our BUY rating.

Below expectations. Berjaya Auto’s (BAuto) net profit for 1HFY16 fell short of expectations, declining 7.4% YoY despite higher sales volumes in both Malaysia and Philippines. The main variance to our forecast was a weaker EBIT margin from an unfavorable sales mix, a competitive operating environment and the weaker MYR. We note that there was a MYR4.2m forex loss during the period. Associate contributions declined,while expenses for network expansion increased. BAuto declared a second quarterly interim DPS of 2.50 sen (2QFY15: 3.25 sen) bringing the cumulative DPS to 4.75 sen, implying a 51% payout ratio.

Forthcoming new model launches. We expect BAuto to introduce the face-lifted completely knocked down (CKD) CX-5 in early 2016, followed by the diesel-run Mazda 2 next March. The Mazda 6 and CX-5 diesel models (both CKD) should emerge by mid-2016 while the CKD CX-3 is planned for end-2016. The locally-assembled CX-3 will be critical to enable BAuto to offer a more competitive selling price. The eagerlyanticipated CX-3 small SUV (completely built up (CBU)) was launched earlier this week.

Forecast and risks. We lower our earnings forecasts for FY16-18 by 6.2%, 9.5% and 12.6% respectively, after trimming our volume and margin assumptions. Risks to our recommendation and TP include: i) unfavorable forex trends, ii) supply chain disruption, and iii) sluggish consumer spending.

Maintain BUY. We continue to like BAuto for its undemanding valuations and recognize Mazda’s ability to continue gaining market share in a challenging market. Nonetheless, the auto industry is currently in a difficult place and facing a difficult year ahead, not least from the weak MYR and lacklustre sentiment. We lower our TP to MYR2.40 (from MYR2.65) after applying an unchanged 12x target P/E to 2016 earnings. At our TP, the implied P/BV is 5.6x, ie a slight discount to the median P/BV commanded by the stock since its IPO in 2013. Its yield is at a reasonable 4.7%, which should also help to support its share price.