Reported Core PATMI of RM52.5m for 1QFY20 (-13.7% QoQ; +5.1% YoY), Below HLIB Expectation (20.3%) and Consensus (21.1%), Due to Lower Than Expected Sales Volume and Operating Margins (on Increased Sales Incentives and JPY Appreciation). Upcoming Attractive Launches of Facelift CX-5, New CX-8 and New CX-30 Are Expected to Sustain BAuto Sales Volume in Both Malaysia and Philippines Markets. Declared First Interim Dividend of 3.25sen/share (ex-date: 9 Oct 2019). Adjusted Earnings Lower by 14.1% for FY20 and 8.6% for FY21. We Still Retain Our BUY Recommendation With Lower TP: RM2.85 (from RM3.08) Based on 14x P/E CY20, as BAuto’s Balance Sheet Remained Strong With Net Cash Position of RM188.5m (16.2sen/share) With Projected Free Cash-flow of RM190-230m P.a., Supporting Its Sustainable Dividend Payout of 12.5- 17.0sen/share, Translating Into Attractive 5.2-7.1% Dividend Yield.

Below expectations. Reported 1QFY20 core PATMI of RM52.5m, which achieved 20.3% of HLIB FY20 forecast profit of RM258.1m and 21.1% of consensus RM249.1m. We deem the result below expectations, as 1QFY20 was affected by: (i) lower than expected sales volume (especially on BAP); and (ii) operating margins on weakened sales volume, higher sales incentives (distribution costs) and JPY appreciation against RM and PHP.

Dividend. Declared a first interim dividend of 3.25sen/share (ex-date: 9 Oct 2019).

QoQ. Despite flattish revenue, core PATMI dropped by 13.7% following lower operating margin on increased sales incentives in 1QFY20 to clear existing inventory of CX-5 model in the quarter prior to the facelift CX-5 launch in Sep 2019 in Malaysia as well as strengthened JPY against RM and PHP.

YoY. Core PATMI increased by 5.1% following higher contribution from associate MMSB from increased production volume of CX-5 for Malaysia.

Outlook. BAuto’s Malaysia operation is expected to remain healthy with the expected attractive line up launches of new CX-30 (2QFY20), new CX-8 (2QFY20) and facelift CX-5 (2QFY20). On the other hand, Philippines near term outlook remains challenging due to implementation of TRAIN tax reform since 2018. Nevertheless, we note that Philippines TIV has shown positive signs of normalization in recent months.

Forecast. We adjusted lower earnings for FY20 and FY21 by 14.1% and 8.6% respectively. We also introduce FY22 earning at RM273.7m, a growth of 3.7% YoY.

Maintain BUY, TP: RM2.85. We maintain BUY recommendation on BAuto with lower TP of RM2.85 (from RM3.08), based on CY20 P/E of 14x, supported by: (i) healthy balance sheet with net cash position of RM188.5m (16.2sen/share); (ii) attractive line up models to sustain sales volume; and (iii) high dividend yield of 5.2-7.1%

Source: Hong Leong Investment Bank Research - 24 Sept 2019