We  came  out  from  our  recent  corporate  luncheon  with  Berjaya  Auto (BAUTO)  feeling  more  positive  on  its  prospects  going  forward.  We believe BAUTO’s growth rate in the next few years will easily outstrip that of its peers as well as the broader market, helped by its compelling product range and increased localisation. Maintain BUY, with a new TP of MYR2.20 (from MYR1.95), based on a FY15F 12.5x P/E.

Highlights  from  our  recent  corporate  luncheon.  RHB‟s recently-held luncheon  (preceded  by  a  presentation)  for  Berjaya  Auto  (BAUTO)  was well attended by 14 fund managers. BAUTO‟s management, led by CEO Dato‟ Sri Ben Yeoh and director Dato‟ Francis Lee, provided insights into its: i) sales volume YTD, ii) strategy for the coming years, iii) preview of its  new  models  to  be  launched,  and  iv)  reaction  to  the  recently-announced  National  Automotive  Policy  (NAP).  The  management  also revealed  that  its  new  assembly  facility  within  the  Inokom  plant  is  on schedule to be commissioned next month.

Five  new  models  in  three  years.  The  first  of  five  new  models  in  the next  three  years  will  be  the  all-new  Mazda  2,  which  we  expect  to  be launched by 4Q14. We believe the other new models will also include C-segment and D-segment models.  

Lifting  our  forecasts.  We  lift  our  FY14-16  earnings  forecasts  by 4.3%/8.7%/16% respectively, after factoring in: i) growth in sales volume from the expansion of its completely-knocked-down (CKD) operations, ii) five  new  models  from  now  till  2016,  and  iii)  an  increase  in  production capacity as well as improved utilisation rates. We have also fined-tuned our margin assumptions in anticipation of increased CKD sales.  

Upgrading TP to MYR2.20. We peg our stock to a new 12.5x P/E (from 12x), broadly in line with peer target valuations and raise our target price to  MYR2.20  (from  MYR1.95).  In  our  opinion,  the  higher  P/E  is  justified considering  the  3-year  FY13-16  EPS  CAGR  of  49.5%.    The  implied target  PE-G  is  only  0.25x.  BAUTO  currently  trades  at  an  undemanding FY15 P/E of 10.3x. Maintain BUY.

Mazda’s YTD sales volume. For 9MFY14, BAUTO recorded sales volume of 6,717 units  in  Malaysia  and  1,591  units  in  the  Philippines,  which  were  in  line  with  our estimates.  Its  CX-5  model  continues  to  be  the  key  driver  of  local  sales  volume, followed by Mazda 6, which was launched last year. In the Philippines, 1HFY14 sales largely comprised CX-5 and Mazda 3. The  Mazda 6 has won Top Gear Philippines‟ 2013 Car of the Year, which has helped to raise the profile of Mazda cars there.

New Mazda assembly facility to be commissioned by April. Management expects the  new  assembly  facility  located  within  the  Inokom  plant  in  Kulim  to  be  fully commissioned  by  April  this  year  according  to schedule.  A  visit  to  the  new  plant  last week  confirmed  that  trial  production  has  already  begun.  Although  utilisation  rates have  yet  to  reach  optimal  levels  due  to  labour  constraints,  we  understand  from  the management  that  productivity  has  improved  gradually  and  by  end-2014,  production rates should reach the level to enable the production of 20,000 units per annum.

New  Mazda  2  with  SkyActiv  technology  to  stir  the  local  B-segment. We  gather from  the  management  that  the  first  of  the  five  new  models  to  be  introduced  in  the next  three  years  is  the all  new  Mazda  2  that could  reach  Malaysian  market  by  end-2014. We understand that the new Mazda 2 will be built in Thailand and come in two variants  –  hatchback  and  sedan.  Both  will feature Mazda‟s award winning SkyActiv technologies. While Mazda has not officially stated that the „Hazumi‟ is in fact the new Mazda  2,  it  mentioned  that  the „Hazumi‟ concept  would  signpost  the brand‟s future subcompact cars from the design perspective. All in, we are confident that this sleek subcompact  car  will  be  well-received  and  should  enable  Mazda  to  reclaim  market share in the B-segment in addition to rounding off its product range.

EBIT margins to be sustainable going forward. BAUTO recorded strong 1HFY14 earnings growth helped by a higher 9.4% EBIT margin (1HFY13: 7.3%). We reaffirm our  view  that  the  EBIT  margins  will  be  sustainable  in  the  upcoming  years  after factoring  in:  i)  improved  CKD  operation‟s margins due to higher localisation,  ii) improved labour productivity, iii) updating our JPY/MYR assumptions, and iv) higher proportion of CKD sales.

Investment  risks.  These  include:  i)  unfavourable  forex  trends,  ii)  supply  chain disruption,  iii)  slower  economic  growth  affecting  demand  for  vehicles,  and  iv) intensified competition that could crimp margins.  

Forecasts.  We  lift  our  earnings  estimates  for  FY14-16  by  4.3%/8.7%/16% respectively,  after  adjusting  our  sales  volume  assumption  and  also  tweaking  the margins from the higher proportion of CKD vehicle sales volume for FY15 and FY16.  

Investment  case.  Considering BAUTO‟s robust  3-year  FY13-16  EPS  CAGR  of 49.5%, we think the stock deserves to trade at a higher 12.5x (from 12x) target P/E, which remains broadly in line with peer target valuations. The implied target PE-G is only 0.25x. Accordingly, we derive a higher target price of MYR2.20 (from MYR1.95). BAUTO currently trades at an undemanding FY15 P/E of 10.3x. Maintain BUY.

Financial Exhibits

Company Profile

Berjaya Auto Berhad is involved in the distribution, assembling, retailing and also the provision of after sales service of Mazda vehicles in Malaysia. The Group is also involved in the domestic distribution of locally assembled Mazda vehicles and the export of the locally assembled Mazda vehicles.

Source: RHB