PUBLIC INVESTMENT BANK

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1 PUBLIC INVESTMENT BANK PublicInvest Research Company Update Friday, March 25, 2016 KDN PP17686/03/2013(032117) BERJAYA AUTO BERHAD Outperform DESCRIPTION Engaged in distribution of Mazda vehicles in Malaysia and the Philippines and retailing of Mazda vehicles and provision of after sales services in Malaysia. 12-Month Target Price RM2.58 Previous Target Price RM2.65 Current Price RM2.15 Expected Return 19.8% Market Main Sector Automotive Bursa Code 5248 Bloomberg Ticker BAUTO MK Shariah-Compliant Yes SHARE PRICE CHART Sep-15Oct-15 Oct-15Nov-15Dec-15Jan-16Feb Week Range (RM) Month Average Vol ( 000) 1,941.7 SHARE PRICE PERFORMANCE 1M 3M 6M Absolute Returns Relative Returns KEY STOCK DATA Market Capitalisation (RMm) No. of Shares (m) MAJOR SHAREHOLDERS 2, ,144.7 % Berjaya Group Berhad 23.6 Employees Provident Fund 6.5 Podium Success Sdn Bhd 6.4 Plant Visit To Inokom Last week, we met with Berjaya Auto (BAuto) s Director, Dato Francis Lee and also visited Inokom Corporation (Inokom) in Kulim, Kedah. Inokom is the contract manufacturer of various marques including Mazda vehicles. Currently, BAuto owned 29%-stake in Inokom. At Inokom, we were taken on a tour around the assembly facilities of Mazda vehicles. Key takeaways from the meeting are (i) opportunity to improve export market, and (ii) more room for growth in the Philippines market in the medium term. However, we cut our FY16-17 earnings forecast by 3%-6% due to the revision in our assumption for JPY currency rates. Nevertheless, we are still positive on BAuto as we believe it should perform better than its peers in terms of earnings growth due to a more superior margin, stable dividend payout and net cash position. Our Outperform call on BAuto is maintained at a revised target price of RM2.58 (previously RM2.65) pegged to 13x FY17F. Opportunity to improve export market. Since June 2013, Mazda Malaysia (MMSB) has been exporting locally assembled CX5 model to Thailand. The target is to export more than half of the production to more overseas markets e.g. Iran, Philippine and Indonesia. Export will improve the economies of scale of CX5. With this >50% exports, yen exposure will be mitigated to a certain extent and help to improve margin. Currently the plant in Inokom is only operating at one working shift, with a production capacity of 20k units but it could do up to 30k units if it operates in two working shifts. We understand that Mazda Japan will invest USD20m in a new Mazda paint shop, which is expected to complete by end of this year. This would allow Mazda Malaysia to increase its production capacity to 40k units. The new paint shop is expected to also produce Mazda s patented color of soul red and pearl white, which are currently only available for CBU units. More room of growth in Philippines market. YTD 9MFY16 sales volume for Philippines was already at 3,500 units, hence we expect the sales volume of FY16F to exceed our expectations of 4,200 units by next quarter. Currently BAuto have 16 third party dealers for the 3S centres. By end of 2016, management expects to have an additional 2 new dealers. We understand that BAuto is in the process of buying a piece of land in Philippines, which is strategically located in between the ports and Metro Manila. The company plans to build a Pre-Delivery Inspection (PDI) and warehouse centre on the 3 hectares land, which might cost them about RM24m-25m. Currently it pays a rental to 3 rd parties warehouses before distributing the vehicles to the dealers. Hence, it will be wise for them to have its own warehouse centre in the future to accommodate an increasing sales volume. Nur Farah Syifaa Mohamad Fu ad T F E nurfarah.syifaa@publicinvestbank.com.my KEY FORECAST TABLE FYE Apr (RM m) 2014A 2015A 2016F 2017F 2018F CAGR Revenue % Operating Profit % Pre-tax Profit % Net Profit % EPS (Sen) % P/E (x) % DPS (Sen) % Dividend Yield (%) % 1 Important disclaimer is provided at the end of this report. PUBLIC INVESTMENT BANK Page 1 of 5

2 Capex for FY17F. BAuto is expected to develop the existing 4 acres land in Padang Jawa, Shah Alam, which is located opposite Puspakom, into a new 3S and PDI centre. It will cost the company c.rm10m-11m. Dividend. For 9MFY16, its dividend per share was 6.90 sen (9MFY15: 8.60), translating to a payout ratio of 54% for FY16. This was lower compared to last year s payout of 61%. However, it was higher than our forecast of 40% for FY16. Mazda Assembly Inokom overview. Inokom is the appointed contract assembler for Mazda Malaysia. The plant is located in Kulim, Kedah and occupying a freehold land of 105 acres built up area with another 95 acres of unutilised area. The company is owned by Sime Darby Motors Sdn Bhd (51%), Sime Darby Hyundai Sdn Bhd (5%), Hyundai Motor Company of South Korea (15%), and Berjaya Auto Berhad (29%). The plant currently assembles 6 marques (i.e. Hyundai, Mazda, BMW, MINI, Land Rover and Ford) and 23 models. For Mazda vehicles, models that are assembled by Inokom are Mazda 3 and CX5. It has 1,750 local staff, of which 610 staff is handling Mazda operations. Manufacturing process flow. CKD Pack receiving & checking at warehouse Body Shop welding (white body storage) Paint Shop (painted body storage) Trim Chassis Final Assembly Pre-delivery Inspection (final quality buy-off/vehicle acceptance Shipment (Domestic/Export). (Figure 1) Figure 1: Inokom Manufacturing Process Flow Key production lines. Inokom has 3 assembly areas of body shop, paint shop and assembly shop. Mazda vehicles only occupy 1 welding line and 1 assembly line, while, paint shop is currently shared with Hyundai vehicles. Figure 2: Inokom Production Lines Assembly Areas Body Shop Paint Shop Assembly Shop Production Lines 3 Welding Lines 2 Painting Lines 6 Assembly Lines 2 Important disclaimer is provided at the end of this report. PUBLIC INVESTMENT BANK Page 2 of 5

3 Figure 3: Body Shop Welding Line Figure 4: Peers Comparison Company P/E (x) P/BV Dividend Yield (%) EBIT Margin (%) Market Cap (RMm) FY16F FY17F FY16F FY17F FY16F FY17F FY16F FY17F ^ DRB-Hicom 2, MBM Resources * 5.9* Tan Chong Motor 1, UMW Holdings 8, ^ Berjaya Auto 2, Average ^ FY16F-17F valuations refer to FY17F-18F data, * including associates and JV earnings Source: Bloomberg, PublicInvest Research estimates 3 Important disclaimer is provided at the end of this report. PUBLIC INVESTMENT BANK Page 3 of 5

4 KEY FINANCIAL DATA INCOME STATEMENT DATA FYE Apr (RM m) 2014A 2015A 2016F 2017F 2018F Revenue 1, , , , ,413.0 Operating expenses (1,290.4) (1,552.3) (1,830.5) (1,977.0) (2,104.3) Other income Operating Profit Share of results of associates & JV Finance Costs (1.1) (0.2) Pre-tax Profit Income Tax (45.9) (79.5) (69.5) (78.0) (85.1) Minorities (3.2) (7.1) (6.6) (7.4) (8.1) Net Profit Growth Revenue (%) Operating Profit (%) Core Net Profit (%) BALANCE SHEET DATA FYE Apr (RM m) 2014A 2015A 2016F 2017F 2018F Property, Plant & Equipment Cash and Cash Equivalents Other Assets Total Assets , ,208.5 Payables Borrowings Tax Payables Other Liabilities Total Liabilities Shareholders Equity Total Equity and Liabilities , ,208.5 PER SHARE DATA & RATIOS FYE Apr 2014A 2015A 2016F 2017F 2018F Book Value Per Share EPS (Sen) DPS (Sen) Payout Ratio (%) ROA (%) ROE (%) Important disclaimer is provided at the end of this report. PUBLIC INVESTMENT BANK Page 4 of 5

5 RATING CLASSIFICATION STOCKS OUTPERFORM NEUTRAL UNDERPERFORM TRADING BUY TRADING SELL NOT RATED The stock return is expected to exceed a relevant benchmark s total of 10% or higher over the next 12months. The stock return is expected to be within +/- 10% of a relevant benchmark s return over the next 12 months. The stock return is expected to be below a relevant benchmark s return by -10% over the next 12 months. The stock return is expected to exceed a relevant benchmark s return by 5% or higher over the next 3 months but the underlying fundamentals are not strong enough to warrant an Outperform call. The stock return is expected to be below a relevant benchmark s return by -5% or more over the next 3 months. The stock is not within regular research coverage. SECTOR OVERWEIGHT NEUTRAL UNDERWEIGHT The sector is expected to outperform a relevant benchmark over the next 12 months. The sector is expected to perform in line with a relevant benchmark over the next 12 months. The sector is expected to underperform a relevant benchmark over the next 12 months. DISCLAIMER This document has been prepared solely for information and private circulation only. It is for distribution under such circumstances as may be permitted by applicable law. The information contained herein is prepared from data and sources believed to be reliable at the time of issue of this document. The views/opinions expressed herein are subject to change without notice and solely reflects the personal views of the analyst(s) acting in his/her capacity as employee of Public Investment Bank Berhad ( PIVB ). PIVB does not make any guarantee, representations or warranty neither expressed or implied nor accepts any responsibility or liability as to its fairness liability adequacy, completeness or correctness of any such information and opinion contained herein. No reliance upon such statement or usage by the addressee/anyone shall give rise to any claim/liability for loss of damage against PIVB, Public Bank Berhad, its affiliates and related companies, directors, officers, connected persons/employees, associates or agents. This document is not and should not be construed or considered as an offer, recommendation, invitation or a solicitation of an offer to purchase or subscribe or sell any securities, related investments or financial instruments. Any recommendation in this document does not have regards to the specific investment objectives, financial situation, risk profile and particular needs of any specific persons who receive it. We encourage the addressee of this document to independently evaluate the merits of the information contained herein, consider their own investment objectives, financial situation, particular needs, risks and legal profiles, seek the advice of their, amongst others, tax, accounting, legal, business professionals and financial advisers before participating in any transaction in respect of any of the securities of the company(ies) covered in this document. PIVB, Public Bank Berhad, our affiliates and related companies, directors, officers, connected persons/employees, associates or agents may own or have positions in the securities of the company(ies) covered in this document or any securities related thereto and may from time to time add or dispose of, or may be materially interested in, any such securities. Further PIVB, Public Bank Berhad, our affiliates and related companies, associates or agents do and/or seek to do business with the company(ies) covered in this document and may from time to time act as market maker or have assumed an underwriting commitment in the securities of such company(ies), may sell them or buy them from customers on a principal basis, may have or intend to accommodate credit facilities or other banking services and may also perform or seek to perform investment banking, advisory or underwriting services for or relating to such company(ies) as well as solicit such investment advisory or other services from any entity mentioned in this document. The analyst(s) and associate analyst(s) principally responsible for the preparation of this document may participate in the solicitation of businesses described aforesaid and would receive compensation based upon various factors, including the quality of research, investor client feedback, stock pickings and performance of his/her recommendation and competitive factors. Hence, the addressee or any persons reviewing this document should be aware of the foregoing, amongst others, may give rise to real or potential conflicts of interest. Published and printed by: PUBLIC INVESTMENT BANK BERHAD (20027-W) 9 th Floor, Bangunan Public Bank 6, Jalan Sultan Sulaiman Kuala Lumpur T F Dealing Line Important disclaimer is provided at the end of this report. PUBLIC INVESTMENT BANK Page 5 of 5