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Tuesday, December 10, 2013

Berjaya Auto - Earnings revision cycle on a strong upward trajectory Buy


- We reaffirm our BUY call on BAuto with a higher fair value of RM2.30/share (from RM2.10/share previously) following sterling interim results announced last Friday night.

- BAuto’s 1HFY14 results had strongly outperformed consensus and was in fact, ahead of our already bullish forecast. The group reported a 2Q14 net profit of RM28mil, which brought its 1H14 earnings to RM54mil – accounting for 142% of consensus estimates and 108% of our projection, if annualised.

- We raise our FY14F-FY16F earnings by 6%-8% to factor in:- (1) lower effective duty cost for a recently launched CBU model due to a favourable change in docket pricing; and (2) higher earnings for 30%-owned Mazda Malaysia Sdn Bhd (MMSB), which strongly outperformed our initial expectation due to better-than-expected margins and better-than-expected JPY rates locked in.

- Despite a lower revenue (-35% QoQ), earnings were up by 6% QoQ as EBIT margins saw a massive uplift from 9% in 1Q14 to 12% in 2Q14 driven by:- (1) a much higher proportion of CKD model sales which fetch higher margins, due to 48% duty savings achieved compared to CBU variants. The CKD CX5 variants (the only CKD model currently) accounted for almost 100% of total CX5 sales and 40% of Mazda TIV, from 70% of CX5 sales and 30% of Mazda TIV in 1Q14; and (2) another CBU model which achieved 15% lower excise duties in 2Q14 due to a change in docket price. The margin uplift as such, looks sustainable in 2H14, depending on margins derived from new models to be launched going forward.

- Revenue contraction of 35% QoQ was due to production hiccups faced for the CKD variants of the CX5. Production for the CX5 averaged only 300-400 units/month in 2Q14 compared to a planned 1,000-1,200/month. In 1Q14, CX5 supply was still mainly in CBU form. However, 3Q14 will see an improvement to circa 550/month, and production may recover fully to the initially planned 1K – 1.2K/month in 4Q14. This will provide further kicker to earnings in 2H14.

- BAuto’s associate, MMSB, registered 1H14 earnings of RM4.5mil, which already met our full year forecast of RM4.5mil. Our chat with management suggests that MMSB achieved stronger margins than our earlier expectations, while JPY rate locked in was lower than our estimates. JPY rates locked in up until Jan 2014 averaged at JPY3.1:MYR and is only up marginally for 4Q14.

- BAuto is deeply undervalued at 10x FY15F earnings relative to sector average of 12x given its strong earnings trajectory, status as a proxy to the upcoming EEV program, and exposure to high growth ASEAN auto markets. Key catalysts include:- (1) launch of CBU Mazda 3 towards 4Q14; (2) CKD Mazda 3 in 1Q-2Q15 which will see the introduction of a high volume 1.5-litre variant; and (3) unveiling of the EEV program in the upcoming NAP review in Jan 2014.

Source: AmeSecurities

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