Cycle & Carriage Bintang Bhd (CCB) reported a net loss of RM2.7m in 1Q18 (from RM0.3m net profit in 1Q17). The weaker results (yoy) was due to higher competition that eroded profit margins. That said, CCB has shown sequential improvement, as CCB narrowed its core net loss from RM7.7m in 4Q17 to RM2.7m in 1Q18. Overall, we deemed the results as inline – we expect RM11.2m dividend income from its 49%-owned MBM to lift FY18 earnings while higher sales volume show improve its profitability in 2H18. Maintain HOLD with an unchanged target price of RM1.95. We are cautious on CCB’s business outlook, in view of the intense competition within the Mercedes dealers and external competitions from other car marques. These negatives are, however, reflected in share price - CCB currently trade at 0.7x P/BV, 2SD below its 5-year historical mean, looks fair.

CCB Reported RM2.7m Net Loss in 1Q18, Within Expectations

CCB’s 1Q18 revenue rose by 10.2% yoy to RM388.6m on the back of higher vehicle unit sales (+21% yoy) and the improvement in servicing of vehicles (+12.3% yoy). Despite the higher revenue, the Group recorded lower EBITDA margins of 0.4% (from 1.1% in 1Q17) due to higher operating costs and shift in model mix from S-Class to the lower margin C, GLC and E-Class. Overall, we deem the results as in line. We expect RM11.2m dividend payment from its 49%-owned Mercedes-Benz Malaysia Sdn Bhd and higher sales volume / margin improvement to lift 2Q-4Q18 profitability.

Sequentially, the Net Losses Has Narrowed

Sequentially, CCB’s 1Q18 core net loss has narrowed from RM7.7m in 4Q17 to RM2.7m in 1Q18. This was achieved by a marginal increase in revenue growth of 2.2% qoq and slight recovery in margins (+2.5ppts) due to lower marketing and promotion activities.

Maintain HOLD With Unchanged TP of RM1.95

We reiterate our HOLD rating on CCB and target price of RM1.95 based on 0.7x FY18E book value (2SD below 5-year mean), implying a 2019E PER of 14x, which we believe is fair. Upside risks: stronger-than-expected sales / profit margins; downside risks: further decline in market share.

Source: Affin Hwang Research - 24 Apr 2018