AmWatch - Berjaya Auto : Making a case to increase manufacturing exposure BUY, 18 Sep 2014

SECTOR FOCUS OF THE DAY

Berjaya Auto : Making a case to increase manufacturing exposure            BUY

We reaffirm our high conviction BUY call on BAuto with an unchanged FV of RM3.70/share. We see increasingly valid reason for BAuto to increase its presence in manufacturing.

Firstly, contribution by Mazda to Inokom is expected to leapfrog over the next few years from 40% to potentially 74% of total capacity by early CY16 (when the CX3 is launched). It is a huge opportunity loss if BAuto does not capitalise on the earnings uptrend.  Acquisition cost can only get pricier as the uptrend becomes more pronounced.

Secondly, the manufacturing unit gives BAuto its only exposure to export earnings; this is only captured by 30%-owned Mazda Malaysia (MMSB) and by extension, Inokom, which is the contract assembler for MMSB for both local CKD and export models out of Malaysia. The Mazda 6 should commence production by 4QCY15 with an estimated capacity of 7K-9K/annum (>50% for exports), while existing CX5 exports should see demand improve with a stabilising political backdrop in Thailand.

Thirdly, BAuto’s balance sheet is under-utilised. It has a huge net cash balance of RM195mil (accounting for 10% of market cap), while dividends are unlikely to eat into this as it only accounts for 30%-60% of FCF. Parent company Berjaya Group has a 15% stake in Inokom, while related company Pesumal has 14%, giving BAuto an ideal avenue to expand its manufacturing presence. Via Inokom, BAuto also rides on the earnings prospect of eight foreign brands that Inokom is assembling for. Buying out part of Mazda Japan’s stake in MMSB is an unlikely option.

BAuto’s only exposure to manufacturing currently is via its 30% stake in MMSB, which contributes circa 10% to bottomline (FY15F). A hypothetical 29% stake in Inokom could double manufacturing division’s contribution to 20% of group earnings, on conservative estimates. BAuto remains our top sector pick and a potential acquisitive growth provides strong immediate-term earnings catalyst.

Others :

Economic Update : Drastic slowdown in inflation if subsidies remain intact in 4Q14

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