Margin Pressure Remains

Cycle & Carriage Bintang Bhd (CCB)’s reported a weak set of results: 6M18 revenue grew 11% yoy on higher vehicle sales but core net profit fell 33% yoy due to higher operating cost and a change in sales mix. Nonetheless, the Group’s 1H18 results was well cushioned by the RM11.2m dividend income received from 49%-owned Mercedez-Benz Malaysia (MBM). Overall, the results were below our expectations. MBM is looking to outdo its 2017 sales of 12k units and plans to roll out 5 model launches during 2H18. Prospects for CCB, however, remains challenging due to competition within the MBM’s dealers. Maintain our HOLD call with unchanged TP of RM1.95.

A Weak Set of Results; Below Expectations

CCB’s 6M18 core net profit dropped 33% yoy to RM6.2m, due to lower 6M18 EBITDA margins of -0.3% (6M17: EBITDA breakeven). Margins continued to be affected by a challenging market environment and higher operating cost. The intense competition within MBM’s dealers and change in sales mixed (skewed to lower-margin products) had supressed CCB’s profit margin. Overall, the results are below our expectations due to the weaker than expected EBITDA margin.

Sequentially Earnings Turned Positive

Sequentially, CCB’s 2Q18 core earnings rose to RM8.9m from its 1Q18 net loss of RM2.7m. The positive sequential results were mainly due to a RM11.2m annual dividend income from MBM, higher revenue (+2%) and slight improvement in EBITDA margins (+0.7ppts).

Earnings Cut; Maintain HOLD

We cut our FY18-20E net profit by 9-20% to reflect a higher operating cost / lower EBITDA margin business environment. We reiterate our HOLD rating on CCB and target price of RM1.95 based on 0.7x CY18E book value (2SD below 5-year mean), implying a 2019E PER of 14x, looks fair. Upside risks: strongerthan-expected sales / profit margins; downside risks: further decline in market share.

Source: Affin Hwang Research - 24 Jul 2018