Berjaya Auto Bhd
(Sept 14, RM2)
Maintain add call with a lower target price of RM3.04: Berjaya Auto’s (BAuto) first quarter ended July 31, 2015 (1QFY16) core net earnings came in below expectations, accounting for 21% of our full-year forecast and 22% of consensus.
Its core net profit declined 6.9% year-on-year (y-o-y) to RM52.2 million while revenue rose 0.9% y-o-y to RM512.5 million.
BAuto registered strong sales volume growth for its Mazda vehicles in both Malaysia and the Philippines in 1QFY16. Its sales volume in Malaysia jumped 17.3% y-o-y to 4,009 units in 1QFY16, with its Mazda 2 and CX-5 models being its bestsellers.
Similarly, its sales volume in the Philippines for its 1QFY16 grew 18.5% y-o-y to 1,010 units, with Mazda 3 and CX-5 its bestsellers.
Although BAuto has successfully sustained its strong sales growth momentum in 1QFY16, its revenue only grew marginally due to a shift in model mix, where the competitively-priced Mazda 2 and Mazda 3 models were the main growth drivers in Malaysia.
Additionally, the implementation of the goods and services tax (GST) in Malaysia on April 1, 2015 impacted its revenue as sales are now recorded net of GST, where previously sales included the old sales tax.
Even with the increase in revenue, BAuto’s net profit dropped 6.9% due to the compression in profit margins. Its operating margin contracted 0.8 percentage point y-o-y, mainly due to strong competition in the Malaysian auto industry.
With its peers undertaking aggressive sales promotions to generate sales, BAuto has stayed true to its stance of not offering discounts on its cars. However, it has resorted to awarding its dealers with extra incentives if they manage to hit the preset sales target.
We cut our FY16 to FY18 earnings forecasts by 4% to 10% due to the anticipated strong sustained competition in the local auto industry and the strengthening of the yen against the ringgit, which we expect to cause a drop in BAuto’s profitability.
However, we reiterate our “add” call on the stock, with BAuto remaining our top pick for the sector.
We believe it can maintain its strong sales growth despite the challenging operating environment. — CIMB Research, Sept 11
This article first appeared in digitaledge Daily, on September 15, 2015.