Investment Highlights

• We maintain our BUY call but raise our FV to RM3.16 (from RM2.60) based on a rolled over FY20 PE of 14.0x. 9MFY19 core earnings made up 95% of our FY19 projection and 92% of consensus estimate. We raise our FY19- 21 projections by 8-23% after increasing volume projections for Malaysia in FY19/20/21 to 16.5K/16.4K/16.6K from 13.2K/14.4K/15.0K.

• BAuto saw a second exceptional quarter with a core net profit of RM79.5mil in 3QFY19 (2Q: RM74.0mil). This was attributable to stellar sales in Malaysia and associate earnings from 30%-owned MMSB.

• 3QFY19 revenue rose 13% QoQ and 39% YoY as the stronger Malaysia sales compensated for the opposite trend seen in the Philippines (Phil). Malaysia volume saw its best quarterly level in at least 3 years as: (1) the new CX-5 saw its best sales since the model’s introduction a year ago; (2) the CX-3 continues to build momentum from 2QFY19 after a lull for four quarters and (3) improving sales of the M2 over the past 3 quarters. The three models accounted for 91% of 3QFY19 Malaysia sales (CX-5: 65%, CX-3: 18%, M2: 8%).

• In 3QFY19, MMSB saw strong sales (at 6K units vs. 1.8-3.6K/quarter prior to 2HFY18) and better PAT margins (now exceeding 9% vs. a peak of 7% previously) thanks to production of the new CX-5 for the local market and exports.

• 9MFY19 core net profit rose 126% to RM203.9mil on a massive jump in revenue and associate earnings. To a lesser extent, this was also contributed by better operating margins (from a stronger MYR/JPY rate and higher CKD contribution in Malaysia of 75% vs. 64% last year) and a reduction in interest costs (after clearing its debt to zero from RM46mil a year ago).

• YTD revenue climbed 37% YoY as the strength in Malaysia mitigated the weakness in the Phil. Malaysia saw a huge improvement in sales of total CX-5 and CX-3 (both doubling YoY), which also benefited from the tax holiday and BAuto’s commitment to absorb the SST cost on orders prior to Sept 2018. Phil sales declined 40% from the higher excise taxes introduced last year; sales are showing signs of normalizing but margins are still significantly lower. The group resolve to weather the current climate and is bracing for sales in Phil to remain weak.

• Our sales projection was raised following the stronger-than-anticipated strength in the 3 key models in Malaysia. We project sales growth rates of 45%/0%/3% in FY19/20/21: this year marks a rebound from the period it sold an average of less than 1K/month. Going forward, it will strive to hold sales at an average of ~1.3K/month with: (1) support from a remaining backlog of 2K units (65% of orders for CX-5); (2) additional models to be launched notably the new M3 in June, variants of the CX-3 and CX-9 in Aug, the CX-8 and new CX-30 in 2HFY20.

• Total dividends for the YTD period rose to 10.8 sen from 5.4 sen last year, though the payout ratio fell to 61% of net profit from 75% in the corresponding period. We retain a projection of an 80% payout for the coming years, resulting in forward yields of 8.2%-8.9%. We believe BAuto continues to see support from strong domestic sales and associate earnings. The addition of new models that include a brand new CKD should augur well for sales in the coming year.

Source: AmInvest Research - 14 Mar 2019