This article first appeared in The Edge Financial Daily, on October 8, 2015.

KUALA LUMPUR: Berjaya Auto Bhd (BAuto) is not raising the selling prices of Mazda cars here anytime soon, despite surging production costs and a volatile foreign exchange.

But it won’t discount the need to do so if the ringgit breaches the 3.8 level for every ¥100 yen, BAuto’s chief executive officer Datuk Seri Ben Yeoh Choon San told The Edge Financial Daily over the phone yesterday.

At the close of trading hours yesterday, the ringgit was trading at 3.5121 for ¥100 yen. Year to date, the yen has appreciated  20.54% against the ringgit, while the greenback has strengthened 20.59% against the local note. 

“[As we move] towards the end of the year, we are trying to hold back for customers. There is no point for us to increase the price under the current economic environment.

“If (the price of) everything starts to increase, it will not be good for the economic environment. [So] we will maintain the current selling price by reducing other expenses,” he said.

He acknowledged, however, that the group’s gross profit margin was under tremendous pressure now. 

Nevertheless, he stressed the group will only revise the selling price should the rising cost exceed its limit. 

“Although the Japanese yen has appreciated against the ringgit, the changes are not as drastic compared with the US dollar,” he said.

BAuto is the official distributor of Mazda cars and spare parts in Malaysia (via Bermaz Motor Sdn Bhd) and the Philippines (through its 60%-owned Berjaya Auto Philippines Inc). 

Yeoh was asked if the group would follow in the footsteps of UMW Toyota Motor Sdn Bhd, which announced on Monday it would be raising the prices of Toyota and Lexus vehicles sold here by between 4% and 16% from January next year, due to the weakening ringgit against the US dollar.

An analyst with a local bank told the daily that BAuto has already hedged against the yen at RM3.15 to ¥100 until end 2015. Thus, it should be sheltered from any current adverse currency fluctuation. 

“I see BAuto having limited exposure to the foreign exchange rate. It may even be able to recognise some forex gains for the financial year ending April 30, 2016 (FY16). As such, I don’t think they will raise prices in the near term,” he said. 

Meanwhile, in terms of sector outlook, Kenanga Research’s analyst Desmond Chong forecast that auto sales would gain momentum, driven by aggressive advertising and promotion (A&P) activities, festivities and stronger seasonal patterns.

“On the flip side, we believe all these catalysts will be at the expense of margin erosion,” he said in a note yesterday.

He said another concern is the unfavourable exchange rates, particularly for auto players such as UMW Holdings Bhd (fundamental: 1.4; valuation: 1.4) and Tan Chong Motor Holdings Bhd (fundamental: 0.55; valuation: 1.4). 

The two automotive groups, he said, have high US-dollar denominated costs due to the import of Complete Build-Up vehicles, Complete Knock Down car packs and other components. 

Kenanga Research maintains its 2015 total industry volume forecast at 667,000 units, while BAuto remains its top pick in the sector, with an “outperform” call, and a target price of RM2.63. 

“We like BAuto for its better growth prospect from low base on the back of strong pipeline of exciting models, relatively stable margins, lower import duties from the Free Trade Agreement with Japan, and potential dividend payouts of 56%, which translate into a 5.7% dividend yield,” Chong said. 

BAuto’s share price has declined RM1.19 or 39.7% from its all-time high of RM3 on May 12 to close at RM1.81 yesterday, with a market capitalisation of RM2.06 billion.

Chong sees value emerging at BAuto’s current price after the recent selldown, as the stock is now trading at an undemanding 9.7 times forward price-to-earnings ratio (PER), a 21% discount to industry’s forward average PER of 12.2 times. 

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