AmWatch - Berjaya Auto : Temporary blip in 4Q, growth resumes beyond BUY, 10 Jun 2015

STOCK FOCUS OF THE DAY

Berjaya Auto : Temporary blip in 4Q, growth resumes beyond    BUY

We reaffirm BUY on BAuto.  Despite a cut in our FY15F EPS, we raise our fair value to RM4.50/share (from RM4.20/share previously) as we roll over our valuation base to CY16F earnings. 4QFY15 results are likely to be weak due to the industry-wide impact of the pre-GST freeze in purchases by dealers. Invoiced sales were higher (+25% QoQ), but was driven by the lower margin Mazda 2 which was recently launched, whereas throughput of underlying, higher margin models such as the CX5 and Mazda 6 were impacted by the delay in dealer purchases. Our FY15F earnings are trimmed 8% to reflect lower margins given the less favorable model mix, but FY16F-17F earnings remain intact.

The issue is a mere blip. April sales recovered strongly to 1,300 units and this momentum sustained in May. More importantly, it was driven by a recovery in higher margin models while Mazda 2 sales sustained at 300-400/month. A mix of higher absolute volumes driven by dealer inventory re-stocking and a higher proportion of higher margin models e.g. CX5, Biante, Mazda 6, Mazda 3 (from an estimated 60% in 4QFY15 to around 75% in Apr-May) should drive a strong bounce in 1QFY16 earnings. BAuto’s volume target for FY16F has been raised to 16K from 14K-15K previously, while at Berjaya Auto Philippines (BAP), targets were also raised to 5K from 4K. Our FY16F Mazda TIV is conservative at 14K for domestic and 4.4K for BAP, but as it is, we are already looking at a 30% EPS growth for FY16F, 13% higher than consensus and well outperforming sector growth of 13%.

Associate contribution should turn positive going forward vs. an accounting loss in 3QFY15 given:- (1) Inokom’s plant upgrade for most of 3QFY15; and (2) units delivered by MMSB to BAuto towards end 3QFY15 were technically “unsold” until sales to end customers materialise. Higher dividends are in the offing considering annual FCF of RM230-260mil and unutilised net cash of RM320mil.  Even at our conservative FY16F 45% payout, yields are attractive at 4.3%.

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