Results: Berjaya Auto (BAUTO MK; BUY; TP: MYR2.40) - Below expectations

Results: Berjaya Auto (BAUTO MK; BUY; TP: MYR2.40) - Below expectations

• Relatively better than peers. BAuto’s 3QFY4/16 earnings also fell short, similar with its peers UMWH and TCM, but remained profitable. We cut FY16-18 earnings forecasts by 10%-25% on lower volume sales and unfavourable JPY/MYR forex. Rolling forward our valuations to CY17, our revised TP is MYR2.40 (-16%), pegged on new 11.5x PER (+1SD) vs 12.5x.

An interim DPS of 2.15 sen (ex date: 30 Mar 2016) lifts FY16-YTD DPS to 6.9 sen (DPR: 54%).

·         3QFY16: Soft volume, unfavourable mix, high cost. BAuto was hit with a triple-whammy (3Q16 EBIT margin: –2.9ppts QoQ):

                     I.        Total vehicle sales contracted 3% QoQ as dealers deferred purchases from BAuto (distributor) in order to clear stocks during year-end.

                    II.        Unfavourable sales mix in the Malaysia operations; CKD:CBU ratio reversed to 48:52 in 3QFY16 (vs 55:45 in 2QFY16). BAuto purchases its CKD cars in MYR (not subject to forex) unlike CBU cars. 3QFY16 sales mix resulted in higher costs amid a weaker MYR.

                   III.        BAuto’s effective JPY100/MYR forex went up to 3.30 from 3.18 in 2QFY16 as its forward hedging ended in Dec 2015.

• Still the rose among the thorns. Despite challenges, BAuto remains profitable and has a slightly better outlook due to new model launches. Its thriving Philippines operation  remains robust (1M16 TIV: +28% YoY) with more potential to unlock. Yields remain decent at 4+% (based on 50% DPR) which has upside given BAuto’s substantial net cash pile.