IN spite of the 20% fall in its share price in the last three months, investors who bought into Berjaya Auto Bhd at its listing in November 2013 are sitting on around 400% returns from share price gains, dividends and the recently completed two-for-five bonus issue.

Given the volatile external environment, some investors are likely to have locked in some of those gains – which possibly caused the recent correction. But more importantly, is the dip a window for those who missed out on the IPO to pick up the shares?

Berjaya Auto director Datuk Francis Lee Kok Chuan opines that at the present level, it is a “good price” for investors to buy into the company, which assembles and distributes Mazda vehicles in Malaysia.

“Our shares are undervalued. Normally, a PER (price-earnings ratio) of 13 to 14 times is quite decent for auto stocks. As a growing company, we should be valued at a higher PER, but obviously, the market disagrees,” he tells digitaledge Weekly.

At its RM2.36 close on Aug 13, Berjaya Auto (fundamental: NA; valuation: NA) was trading at a PER of 12.4 times.

In comparison, Tan Chong Motor Holdings Bhd (fundamental: 0.55; valuation: 1.40), which assembles vehicles for Nissan Motor Co, is trading at 15.8 times earnings. UMW Holdings Bhd (fundamental: 1.80; valuation: 1.40), the largest shareholder of Perusahaan Otomobil Kedua Sdn Bhd (Perodua) and distributor of Toyota vehicles, is trading at 17 times PER.

All the seven research analysts who track Berjaya Auto have a “buy” call on it, with target prices ranging from RM3 to RM3.50. In other words, they reckon the counter still has 27% to 48% upside potential. The two-for-five bonus issue, which was completed in June, is also expected to boost the stock’s liquidity.

In the light of the current poor market sentiment, Lee acknowledges that it will be difficult for Berjaya Auto shares to perform well in the near future. “Everybody is panicky in the market. They just don’t care and dump shares,” he says.

The 55-year-old, who was appointed to the board of Berjaya Auto in 2011, is also CEO of Berjaya Food Bhd (fundamental: 1.75; valuation: 2.10) and a director of High-5 Conglomerate Bhd.

Currently, prominent businessman Tan Sri Vincent Tan Chee Yioun’s Berjaya Corp Bhd (fundamental: 0.90; valuation: 2) is the single largest shareholder of Berjaya Auto, with a 34.28% stake. Berjaya Auto CEO Datuk Seri Ben Yeoh Choon San has a 6.49% stake while the Employees Provident Fund (EPF) has 6.08%.

Interestingly, Berjaya Auto and Tan Chong Motor’s stocks have performed conversely in the past 52 weeks, with the former advancing 34% from a year ago and the latter falling 50%.

But it is also worth noting that Berjaya Auto’s market capitalisation is now 1.6 times that of Tan Chong, although Nissan car sales volume was 3.5 times that of Mazda last year.

At an initial public offering (IPO) price of 70 sen apiece, Berjaya Auto was listed on Bursa Malaysia in November 2013. Since then, its market capitalisation has grown from RM560 million to RM2.69 billion.

Meanwhile, the group’s net profit increased from RM50.86 million in the financial year ended April 30, 2013 (FY2013) to RM215.41 million in FY2015. Revenue grew from RM1.06 billion to RM1.83 billion.

Lee believes the group has the right formula to sell cars to the younger generation. “There is a growing number of Mazda cars in the Malaysian market now. We want to attract a new generation of buyers, the premium customers. Youngsters today are different. They want a stylish car with the latest technology,” he comments.

Berjaya Auto aims to grow its Malaysian sales by 20% per annum in the next three years, says Lee. The group expects to register a profit growth of 10% in FY2016 on the back of 20% revenue growth.

Lee adds that Berjaya Auto plans to sell 16,000 Mazda vehicles in Malaysia in FY2016, compared with 12,209 units sold in FY2015.

The higher sales will be driven by the all-new Mazda 2 completely built-up (CBU) model imported from Thailand, as well as the Mazda 3 and CX-5, which are completely knocked-down (CKD) models assembled at Inokom Corp Sdn Bhd’s plant in Kulim, Kedah. The three bread-and-butter car models are expected to contribute 75% to Berjaya Auto’s sales.

Currently, the company has more than 10 CBU models in its portfolio but only two CKD models. The group has delayed the launch of the Mazda 6 CKD model as it is not expected to be a high-volume driver.

“The next CKD model will either be the Mazda 6 or CX-3. It could happen in the middle of next year, but nothing is firmed up yet. Mazda 6 is not in Thailand yet, so our principal wants us to build and export it to Thailand,” says Lee.

Out of the 12,209 units sold in FY2015, 7,552 or 62% were CBU models. Lee says CKD models will be the main sales driver in FY2016 with 60%, thanks to the full-year contribution of the locally assembled Mazda 3.

Lee says Berjaya Auto will launch the new Japanese-made CX-3 in November and plans to sell 80 to 100 units each month. It will move on to the CKD project for the model in the second half of 2016.

Berjaya Auto will also launch the diesel variant of Mazda 2, a CBU model imported from Thailand, in November before it brings in the new Mazda 6 and CX-5 (both with a 2.2-litre turbo diesel engine) by end-April next year.

With a line-up of new Mazda cars, Lee says, Berjaya Auto aims to double its market share in the non-national car segment to 7% to 8%, which translates into 22,000 to 23,000 units a year. However, he clarifies that the group has no plans to grow sales to as big as that of Honda, Toyota and Nissan.

“This is a volume that we are very comfortable with, that’s all we want to do. We might stretch ourselves if we do anything more than that. Our profit margin could be affected if we give discounts to clear stock,” says Lee.

He explains that the more a car maker produces, the cheaper the cars might have to be. This is because discounts will have to be given to clear stock if it is stuck with a depreciating inventory, on top of holding cost.

“Two years after listing, we are still growing from a small base and it’s easier to gain market share in the non-national car segment. As long as the returns to shareholders are there, and the risk is mitigated, we are happy with our volume. We would rather grow slowly and steadily every year,” says Lee.

He adds that Berjaya Auto, which maintains a healthy balance sheet, is committed to pay out at least 50% of its net profit as dividends in the coming years, although there is no such dividend policy in place. As at April 30, the company was sitting on a net cash position of RM280.8 million.

“This is a cash-rich, debt-free and asset-light company. We want to keep it this way. If the company doesn’t need the cash (for expansion), we will pay [it] out as dividends. So, you may say that Berjaya Auto is a combination of growth stock and dividend play,” Lee says.

Berjaya Auto, which has no plans to undertake any major M&A activity, might purchase a 5% stake in Inokom from Berjaya Corp, raising its stake to 29%. Inokom Corp is a consortium that produces 23,000 Mazda cars every year. Its other shareholders are Sime Darby Motors Sdn Bhd (51%), Hyundai Motor Co of South Korea (15%), Sime Darby Hyundai Sdn Bhd (5%) and Berjaya Corp (5%).

If Berjaya Auto can establish itself as a company that delivers both consistent earnings growth and steady dividends, it would not be short of investors in the long run.

Note: The Edge Research’s fundamental score reflects a company’s profitability and balance sheet strength, calculated based on historical numbers. The valuation score determines if a stock is attractively valued or not, also based on historical numbers. A score of 3 suggests strong fundamentals and attractive valuations. Visit www.theedgemarkets.com for more details on a company’s financial dashboard.

This article first appeared in digitaledgeWeekly, on August 17 - 23, 2015.