This article first appeared in The Edge Financial Daily, on May 9, 2016.

Berjaya Auto Bhd
(May 6, RM2.29)
Maintain buy with a higher target price (TP) of RM2.60: We recently hosted Berjaya Auto Bhd (BAuto), represented by Datuk Francis Lee, who met 12 fund managers at a two-day non-deal roadshow in Hong Kong. News of the current management buying out Berjaya Group’s (BGroup) stake in BAuto was positively taken and it was the main focus. Other highlights included potentially higher dividends and the listing of its Philippine operation. 

We trim our financial year ended April 30, 2016 (FY16) to FY18 earnings forecasts by 3% to 5% to account for lower vehicle sales expectations. We maintain “buy” with a higher TP of RM2.60 (+8%) as we peg BAuto at a higher calendar year 2017 (CY17) price-earnings ratio of 13 times (+0.5 standard deviation) (versus 11.5 times previously) to reflect the valuation of its Philippine operation. 

Following news of a special-purpose vehicle (SPV) structure (in mid-April) for the current BAuto management to hold a controlling stake in BAuto, BGroup was able to pare down its initial 21.88% stake to 14.05% (based on the latest filing with Bursa Malaysia on April 20) via private placements to selected institutional shareholders. Further clarity is pending from management on the revised structure of the SPV. 

Nonetheless, we remain positive on this development, which exerts management’s confidence in BAuto’s outlook. Other key positives discussed were potentially higher dividends and the listing of the 60%-owned Philippine operation. There could be much value to unlock, in our view, given that car sales in the Philippines have been buoyant, with a 19% four-year (2011 to 2015) compound average growth rate (CAGR) (total industry volume in the first quarter of 2016: +22% year-on-year). 

Its closest comparison in the Philippine auto industry would be GT Capital Holdings Inc, a conglomerate with exclusive distributorship of Toyota marques. Our Maybank Kim Eng Philippines Research counterpart values GT Capital’s auto business at 25.5 times CY17 earnings per share for Toyota’s unrivalled dominance (39% market share in 2015) in the Philippine market.

Drastic fluctuations in the yen/ringgit rate (¥100/RM3.74 currently) from our base assumption of ¥100/RM3.60 could swing earnings. Also, delays in the launch of the CX-3 completely knocked-down (about 8% of our FY17 group volume sales forecast) would negatively impact our earnings forecasts. 

We lower our FY16/FY17/FY18 group-wide (Malaysia and the Philippines) vehicle sales assumptions by 3%/6%/6% to 19,900/24,300/24,800 units respectively (first nine months of FY16: 15,107 units), from 20,600/25,800/26,500 units. Correspondingly, our FY16/FY17/FY18 net profit forecasts are lowered by 3%/5%/4%. No changes were made to our yen/ringgit assumptions of ¥100/RM3.40 for FY16, and ¥100/RM3.60 for FY17 and FY18. — Maybank Investment Bank Research, May 6