Berjaya Auto - A game-changing transformation Buy

We initiate coverage of BAuto with a BUY and a FV of RM2.10/share. Our valuation pegs BAuto at 13x FY15F (YE Apr) earnings, at a premium to sector average. Our high conviction BUY on BAuto is premised on several factors:- (1) A massive 68% earnings CAGR over FY13-16F riding on a strategic transition to a CKD business model; (2) A key beneficiary of Malaysia’s soon-to-be announced Energy Efficient Vehicle (EEV) program; (3) The best Malaysian proxy to high growth and underpenetrated auto markets within ASEAN; and (4) A capex-light, high growth business structure with a solid balance sheet - net cash of RM114mil post-IPO (14sen/share).
- BAuto is an early cycle play into the expansion of Mazda’s ASEAN CKD operations - overseas production ratio is expected to grow to 50% by FY16F from 30% in FY12. Malaysia is earmarked as one of Mazda’s key production base with a recent RM100mil investment into manufacturing facilities kicking off production in May 2013, entailing capacity of 15K-20K/annum.
- The transition from a high cost CBU-centric business model to a CKD driven one is key in driving: (1) A more efficient cost structure (average excise duty per car will reduce by 12%-25% over FY14-15F) (See Chart 10); (2) Price competitiveness of new models (See Table 1). Mazda TIV is expected to grow by 18%-33% over FY14-15F riding on new CKD launches: CX5 in June 2013, followed by Mazda 3 and 6 in 3Q-4QCY14. The higher composition of CKDs (from 0% in FY13 to 51%-82% in FY14-15F) and outright volume growth will drive an almost doubling of earnings in FY14F and another 30% growth in FY15F.
- BAuto is also a key proxy to Malaysia’s EEV program, riding on the global rollout of Mazda’s new generation fuel efficient SkyActiv-equipped models (See Tables 3-4). Thanks to a more competitive cost base from EEV incentives, BAuto is now riding on export earnings to Thailand and potentially other high-growth ASEAN markets. The CX5 (pre-qualified as EEV) is the 1st export model at a rate of 1,000/month. The new Mazda 6 is the 2nd earmarked for exports. MMSB (30:70 JV with Mazda Japan, housing CKD & export operations) will account for 10% of earnings by FY15F from a loss of RM1.5mil (FY13), entailing a massive 79% CAGR over FY14F-16F.
- The Philippines is another growth market where BAuto recently secured a Mazda distributorship. Given Philippines’ penetration rate of just 9 cars/1,000 population, BAuto Philippines is expected to grow at annual rate of 27% per annum, accounting for 7%-8% of group earnings.
- At 9.5x FY15F earnings, BAuto is deeply undervalued against the sector average of 12x, despite a strong earnings trajectory, overseas earnings exposure and its status as a high growth, entrepreneur-driven company. Our projections are currently 47%-67% higher than consensus over FY14-16F. An imminent consensus earnings revision is a strong near-term catalyst.
Source: AmeSecurities