Berjaya Auto (BAUTO MK; BUY; TP: MYR3.50; Upside: 21%): Turbo-charged kick start

Berjaya Auto (BAUTO MK; BUY; TP: MYR3.50; Upside: 21%): Turbo-charged kick start

• What's New? 1QFY4/15 core net profit of MYR60m (+12% QoQ, +139% YoY) accounted for 28%/31% of our/consensus full-year forecasts, in line considering seasonally stronger Hari Raya sales. Headline net profit of MYR56m included ESOS charge, forex loss and derivatives loss amounting to MYR4m.

BAuto also declared a 2sen interim dividend to go ex on 23 Sep 2014.

·         What’s Our View? Our forecasts are unchanged. BAuto remains our Top Pick within the auto space for its strong earnings trajectory (32% 2-year net earnings CAGR) driven by its strong new launches pipeline and capacity expansion.

We also see potential near-term boosts to earnings from (i) fast-growing TIV in the Philippines (+26% YoY in 7M14) and (ii) favourable forex. MYR/JPY currently trades at MYR3.02/JPY100 vs our assumption of MYR3.13/JPY100 for FY4/15. Assuming the MYR/JPY stays at MYR3.02/JPY100, our sensitivity analysis suggests a 10% improvement to BAuto's earnings on a full-year basis.

BAuto is also well equipped with net cash of MYR229m (~MYR0.29/share) as at end-Jul 2014 and given little capex requirement, we do not rule out additional dividend payments in the near future. Currently, we assume a 30% DPR which translates to yields of 3%. BAuto has a dividend policy which allows it to pay up to 40% of earnings.

Following its successful foray in the Philippines, BAuto now eyes a partnership with a local player for distribution of Mazda vehicles in Indonesia. A successful foray into this market will widen BAuto's earnings base and warrant a further re-rating.

Risk/reward ratio remains compelling. Reiterate BUY.

·         Undemanding valuations. While share price have jumped 4x since our initiation/IPO in November 2013, BAuto’s valuations remains inexpensive, backed by stronger results on favourable operating condition and near-term earnings catalysts; (i) Mazda marque gaining traction globally with new ‘SKYACTIV’ated model launches and (ii) weak JPY, translating to cheaper component cost.

BAuto currently trades at 10.0x CY15 PER vs the auto sector market’s weighted average of 14.2x CY15, offering a 21% upside to our top end of the Street TP of MYR3.50 (unchanged 12x CY15 PER) and supported by net yield of 3% (based on 30% DPR).