Reported core PATMI of RM21.4m for 2QFY20 (-59.2% QoQ; -71.0% YoY) and RM73.8m for 6MFY20 (-40.3% YoY), below HLIB expectation (33.3%) and consensus (31.5%), due to lower than expected sales volume (phase off of previous CX-5 model combined with delay in new launches) and operating margins. BAuto will leverage on the newly launches of CX-5 facelift and new CX-8. Upcoming attractive launches include new CX-30 and MX-30. Declared second interim dividend of 2.75sen/share (ex-date: 28 Jan 2019). Adjusted earnings lower for FY20-22 by 25.5-27.1%. We still retain our BUY recommendation with lower TP: RM2.38 (from RM2.85) based on 14x P/E CY21, as BAuto’s balance sheet remained strong with net cash position of RM178.0m (15.3sen/share) with projected free cash-flow of RM163-173m p.a., supporting its sustainable dividend payout of 12.0-15.0sen/share, translating into attractive 5.6-7.0% yield.

Below expectations. Reported 2QFY20 core PATMI of RM21.4m, bringing 6MFY20 to RM73.8m, as compared to HLIB FY20 forecast profit of RM221.3m (33.3%) and consensus RM234.6m (31.5%). The disappointments were due to: (i) lower than expected sales volume of Malaysia operation following phase of previous CX-5 model as well as delayed in sales of CX-8; and (ii) weak operating margins on weakened sales volume, higher sales incentives (distribution costs) and JPY appreciation against RM and PHP.

Dividend. Despite the disappointing results, BAuto still declared a second interim dividend of 2.75sen/share (ex-date: 28 Jan 2020) given its strong balance sheet and high level of net cash holding. Total dividend declared for 1HFY20 was 6.0sen/share. We expect 12.0sen/share dividend for FY20.

QoQ/YoY/YTD. Following lower volume of Mazda sales in Malaysia (see figure #3) and lower associate MMSB production volume, core PATMI dropped by 59.2% QoQ, 71.0% YoY and 40.3% YTD. BAuto has been phasing out existing inventory of previous CX-5 model in 1HFY20 and faced delayed in the launches of facelift CX-5 model and new CX-8 model in 2QFY20. Furthermore, the margins for both BAuto and MMSB were affected by the strengthening JPY against RM. Nevertheless, contribution of BAP has improved in 2QFY20 following sales contribution from new Mazda 3.

Outlook. BAuto will leverage onto the newly launched CX-5 facelift and new CX-8 in 2HFY20. Other highly anticipated models are CX-30 (targeted to launch in 3QFY20) and MX-30 (hybrid or EV), recently reviewed in Tokyo Motor Show.

Forecast. We adjusted lower earnings for FY20-22 by 26.3%, 27.1% and 25.5% respectively, after imputing lower sales volume and overall margins.

Maintain BUY, TP: RM2.38. We maintain BUY recommendation on BAuto with lower TP of RM2.38 (from RM2.85), based on CY21 P/E of 14x (rolled forward from CY20), supported by: (i) healthy balance sheet with net cash position of RM178.0m (15.3sen/share); (ii) attractive line up models to sustain sales volume; and (iii) high dividend yield of 5.6-7.0%.

Source: Hong Leong Investment Bank Research - 17 Dec 2019