Berjaya Auto (BAUTO MK; BUY; TP: MYR3.50; Upside: 12%): Pedal to the metal

Berjaya Auto (BAUTO MK; BUY; TP: MYR3.50; Upside: 12%): Pedal to the metal

• What's New? We recently hosted BAuto on a 2-day Non-Deal Roadshow (NDR) in Singapore and met with over 15 fund managers. The management was represented by Dato’ Francis Lee (Non-Executive Director).
• What’s Our View? Institutional funds were generally receptive towards BAuto’s promising business direction in Malaysia and the Philippines, and potential venture into Indonesia. While a foray into the Indonesian market will expand BAuto’s regional footprint, management is concern about regulatory instability post recent election.

Investors were mostly concern about BAuto’s future sales growth given the limitation of 30%-owned MMSB’s production capacity. MMSB is currently in talks with Sime Darby Motors for a JV to build a dedicated state-of-the-art paint shop within the vicinity of Inokom’s Kulim plant. In the meantime, the existing Kulim plant is undertaking a 3 weeks upgrading beginning October 2014 to improve the efficiency of the paintshop (cost: ~MYR18m-22m) which will raise 30%-owned MMSB’s capacity to 20k units p.a. (+67%), from ~12k units p.a. presently.

For now, management have guided for higher quarterly dividend payout due to low capex requirement (manufacturing plant capex to be undertaken by 30%-owned MMSB). As at end-July 2014, BAuto sits on cash warchest of MYR226m (MYR0.28/ share) and has a dividend policy which allows it to pay up to 40% of earnings (we have assumed 30% DPR in our forecasts).

• Stars remain aligned. BAuto’s growth trajectory (30% 3-year net earnings CAGR) is on track driven by its attractive new launches and capacity expansion. BAuto is bringing forward the launch of Mazda2 to mid-Jan (from 2Q15) with attractive price tag of ~MYR85k. This model will be CBU Thailand and as such, there is no cap on the number of Mazda2 that BAuto can bring in according to AFTA. Also, the Mazda2 was recently crowned ‘2014-2015 Car of the Year Japan’.

While our forecasts are unchanged, we see potential positive surprises to earnings from: (i) stronger than expected demand for the soon-to-be-launched Mazda2, (ii) surging TIV in the Philippines (+28% YoY in 8M14) and (iii) favourable forex. Maintain BUY.