Reported core PATMI of RM25.6m for 3QFY20 (+19.6% QoQ; -68.9% YoY) and RM99.4m for 9MFY20 (-51.7% YoY) were below HLIB (60.8%) and consensus (55.9%) expectations due to lower-than-expected sales volume and operating margins. BAuto will leverage on the newly launched CX-5 facelift, CX-8 and CX- 30. Declared third interim dividend of 1.45sen/share (ex-date: 04 May 2020). FY20-22 earnings were adjusted lower for FY20-22 by 18.5-33.8% as we expect a market slowdown with competitive pressure amidst outbreak of Covid-19. Downgrade our recommendation to HOLD (from BUY) with lower TP: RM1.45 (from RM2.38) based on lowered 12x P/E (from 14x) of CY21 earnings. BAuto’s balance sheet remains strong with net cash position of RM98.3m (8.5sen/share) with projected dividend yield of 6.4-6.8% for FY20-22.

Below expectations. Reported 3QFY20 core PATMI of RM25.6m and brought 9MFY20’s to RM99.4m, against HLIB FY20 profit forecast of RM163.4m (60.8%) and consensus’ RM177.9m (55.9%). The disappointments were due to: (i) lower-than expected sales volume of Malaysia operation following delayed launches of CX-5 and CX-8; and (ii) deteriorated operating margins on higher regulatory costs (in Malaysia), lower group sales volume, and JPY appreciation against RM and PHP.

Dividend. Despite the disappointing results, BAuto still declared a third interim dividend of 1.45sen/share (ex-date: 04 May 2020) given its strong balance sheet and high level of net cash holding. Total dividend declared for 9MFY20 was 7.45sen/share.

QoQ. Core earnings improved 19.6% following better sales mix (new contributions from CX-8 and CX-30) and higher associate contribution from 29% -owned Inokom on higher sales volume.

YoY & YTD. Following lower volume of Mazda sales in Malaysia (see Figure #3) and lower associates’ (MMSB and Inokom) production volumes, core PATMI dropped by 68.9% YoY and 51.7% YTD. BAuto has been phasing out existing inventory of previous CX-5 model in 9MFY20 and faced delays in the launches of facelift CX-5 model in 2QFY20 and new CX-8 model in 3QFY20 as well as higher regulatory costs. Furthermore, the margins for both BAuto and MMSB were affected by the strengthening JPY against RM. Nevertheless, contribution of BAP has further improved in 3QFY20 following sales contribution from new Mazda CX-30 and CX-8.

Outlook. The recent outbreak of Covid-19 has severely affected global economy activities. As such, we expect Malaysia economy to slow further (below Bank Negara’s target of 4.3-4.8%) and potentially impact consumer sentiment in the near term. Nevertheless, the government has started implementing stimulus plan to support the economy. On the other hand, Philippines has started lockdown on Manila Capital for a month until mid-April, an effort to contain the pandemic.

Forecast. We lower earnings for FY20-22 by 22.4%, 33.8% and 18.5% respectively, after imputing lower sales volume and overall margins.

Downgrade to HOLD, TP: RM1.45. We downgrade our recommendation to HOLD (from BUY) with lower TP: RM1.45 (from RM.2.38), following our cut in earnings and targeted P/E to 12x (from 14x) on CY21 earnings The group is supported by a healthy balance sheet with net cash position of RM98.3m (8.5sen/share) with projected dividend yield of 6.4-6.8% for FY20-21.

Source: Hong Leong Investment Bank Research - 17 Mar 2020