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
Paul Tan
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