Price on 15/9/2016: RM2.30

Market Cap: RM2.631b

Shares Outstanding: 1,144m

Listed on Main Market of Bursa Malaysia on 18 Nov 2013

Ok I have a confession to make. I bought shares in this company first before actually doing a thorough analysis on it. Of course I had my reasons why I did it. But, if I had analysed it better, I might act differently.

Anyhow, here I’m going to tell you why I thought it’s a great company with strong fundamentals. Basically justifying my reasons of buying them in the first place. And then I’ll tell you what’s bothering me with it with their business, more accurately the market they are in.

Who is BJAUTO?

At this early stage of my investing ‘career’, I really prefer to look at businesses that are simple and straightforward. At least simple enough for me – mind you I have zero background on business related studies or whatsoever – to understand.

Acknowledging myself as a value investor, I really do believe investing is about putting your money in a real business and so we own a part of the company i.e. being a shareholder. So, as an owner, of course you want to know what kind of business you are in, how does the business makes money, etc.

BJAUTO or Berjaya Auto Berhad is primarily involved in distribution and retailing of new and used Mazda vehicles, and also the provision of after-sales services. So, you see those Mazda cars on the roads? Yes all of them are distributed by this company. The cars, spare parts, maintenance services etc. The company also has their own local assemblies of Completely Knocked-Down (CKD) models such as Mazda3 Skyactiv CKD that can boost their sales due to cheaper price.

So how do they make money? When you buy a Mazda3 or CX5, they make money. When someone sends their Mazda to do servicing, they make money. When a Mazda car needs repairing and needs spare parts, they make money. As a matter of fact, 95% of BJAUTO’s revenues come from the sales of their motor vehicles. Which means more sales of new cars directly results to higher company revenue.

Fundamentally good

Now I know about the company, let’s look at the numbers and analyse whether is it a sound company or not. Here I’m generally looking at the company’s financial statements and look for any red flags that I consider it to be risky.

First thing that caught my attention, ZERO DEBTS. Some might argue that without any debts, the company is not able to use leverage and thus increase profits. True. But I like to keep it safe. Low on debts – in this case, none – means that in really tough times, they are more likely to survive since they have no commitments to any financial institutions to make any payments. This is definitely useful when I talk about the market in the next section.

BJAUTO has a current ratio of 2.59, more than my minimum tolerance ratio of 2. This is about liquidity. It is generally the ability of the company to pay back its short-term liabilities. Apart from that, they have RM126.5m worth of cash in hand. Just for the sake of being extra safe, with a cash ratio of 1.23, they can even pay off their short-term liabilities by just using their cash and cash equivalents.

Their earnings have also been consistent and steadily increasing throughout the 3 years with average PBT margin of 14%. Also strong FCF of RM182m on average annually. FCF is essential to me personally as it ensures the company generated enough money after spending on capital expenditures to pay continuous dividends to the shareholders. In fact, in the last FY, the company handed out a dividend of 12.9 sen a share, which gives a dividend yield of 5.72%. That’s not bad at all.

Returns? The company has managed to give an amazing return with ROA of 26.7%, ROE of 45%, and ROIC of 70.1%! They are basically how much money you get back on your assets, equities, and invested capitals respectively. I doubt you can get any better than that.

Another thing that also caught my attention with this stock is that BJAUTO has performed a buy back of their shares from the marketplace. They had bought back 1.4m of their shares amounting to RM2.78m as reported in their AR2016. More buy backs has also been reported at the end of June 2016 for another 625,000 shares. Is this good?

In simple terms, company buy backs means that they are decreasing the number of shares outstanding in the market thus giving shareholders more ownership percentage in the company. Shares repurchasing shows that the company believes its shares are undervalued and is an efficient way of putting money back in shareholders’ pockets. See, even the company thought that their own stocks are undervalued.

You see, by looking at these numbers, I was so convinced that I have found a great company with strong balance sheet and earnings, hence justifying my decision to own a part of this business.

Tough times ahead

Now it’s all nice and good, comes the question what could go wrong? Yes the business has been good with consistent earnings and good returns, but can it produce the same result in the future?

This is where I have overlooked. As I said earlier, 95% of the company’s revenue comes from the sales of their motor vehicles. Therefore in order for them to get a consistent or better earnings in the future is to make more sales than they have made before.

Now that’s where I start to feel a bit uncomfortable. Currently, the demand for cars is low in view of the present economic situation. Reports came out with new car sales in Malaysia plunged 28% year on year in July. Sales of Toyota, Honda, and Proton all have decreased this year. The automotive business are very much cyclical. When the economic situation is bad, we tend to spend less especially on cars, properties, or anything that requires a relatively large amount of money. Not only new cars are affected, even used car dealers are having a difficult time, as sales are hard to come by.

Mazda’s market share in Malaysia is also relatively small at 2.1% compared to Honda and Toyota at 14.2% and 14.1% respectively. Saying that, Mazda is still ranked number 6 by brand in terms of market share. However, with the Total Industry Volume (TIV) are expected to decline by 10.8% this year, I expect BJAUTO’s revenue to be greatly affected in the future until the market sentiment improves.

There’s also the weakening Malaysian Ringgit MYR to Japanese Yen JPY that will impact the cost of their operations. Of course there’s nothing the company can do to make the MYR stronger, but it remains something for us investors to take into account.

Verdict

Based on the reasons I stated above, I foresee that automotive sales will continue to decline in the near future (for how long I don’t know). So BJAUTO’s business most likely will be affected by this and also due to the weak MYR to JPY, which can impact the cost of sales. I am not surprised if their share price will go further down when this happens but they will definitely represent a golden opportunity for value investors.

However, due to BJAUTO’s strong balance sheet, zero debts and cash balance, I am hopeful that it will be able to weather the storm. And hopefully, with new models coming and also the company’s commitment towards local assemblies of CKD models, this can lead to only good things for them. The chairman also said subtly that the company “can consider establishing strategic business alliances with other car manufacturers, whose products will complement rather than compete with the Mazda brand”. I do believe it’s important for companies to be resilient and at the same time keep on investing on their CAPEX at these tough times so that they can reap the benefits when the good times comes.