Berjaya Auto to ride on Inokom’s earnings uptrend

by **Cals** Wed 03 Dec 2014, 21:19

Berjaya Auto to ride on Inokom’s earnings uptrend

Berjaya Auto Bhd
(Dec 2, RM3.31)
Maintain outperform with target price (TP) of RM 3.82. Berjaya Auto Bhd (BJAuto) ([You must be registered and logged in to see this image.] Financial Dashboard) announced that it had entered into separate share sale agreements with Berjaya Group ([You must be registered and logged in to see this image.] Financial Dashboard) and Perusal (M) to acquire 20 million ordinary shares, representing a 20% equity interest in Inokom Corp Sdn Bhd (Inokom) for a total cash consideration of RM30 million (or RM1.50 per share).
The considerations for the acquisition will be funded entirely from BJAuto’s internally generated funds.
Inokom is principally involved in the manufacturing and assembly of light commercial and passenger vehicles, and contract assembly of passenger vehicles. It is also the contract assembler for Mazda completely knocked down (CKD) models namely Mazda 3 and CX-5 in Malaysia. It recorded a core net profit (NP) of RM9.2 million in the financial year ended June 2013 (FY13).
Although the RM1.50 per share valuation for Inokom appears to be stretched based on our back-of-the envelope calculation, we laud the management’s move and are positive on the deal as this allows the group to ride on Inokom’s earnings uptrend, which is benefiting from BJAuto’s aggressive launches of its CKD models in Malaysia, with higher earnings contribution to BJAuto’s associate level (currently only contributed by Mazda Malaysia Sdn Bhd), and wide exposure of eight foreign brands that Inokom is assembling.
Assuming a conservative two-year compound annual growth rate of 5% from Inokom’s FY13 core NP of RM9.2m, which arrives at Inokom FY15 core NP of RM10.2 million, this could contribute at least RM2 million to the associate earnings of BJAuto in FY15.
The balance-sheet impact is minimal as BJAuto is still sitting on a huge net cash pile of RM229.1 million. —Kenanga Research, Dec 2
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This article first appeared in The Edge Financial Daily, on December 3, 2014.