Cycle & Carriage Bintang (CCB)’s 9M18 core earnings was ahead of our expectations. The better set of earnings was driven by higher vehicle sales and margins, thanks to the zero-rated Goods and Services Tax (GST) period. We raise our FY18E core EPS forecasts by 7% to account for the strong 3Q18 results, which we believe is not sustainable. We roll forward our valuation horizon to 2019E and raise our 12-month TP to RM2.00. The shift to lower margin cars and intense competition within Mercedes-Benz’ dealers will likely continue to squeeze CCB’s profit margins moving forward.

9M18 Core Earnings Up 22% Yoy on Higher Sales

CCB’s 9M18 core earnings rose by 22% yoy to RM7.3m, attributable to higher Mercedes-Benz sales (+17% yoy), benefitting from the tax holiday period between June to August in 2018. Consequently, EBITDA margins have turned positive - a 1 ppts increase to 0.6% in 9M18. All in, results were above our expectations, accounting for 83% of our FY18E estimates due to the strong sales and margin in 3Q18.

Operationally, 3Q18 Was a Stronger Quarter Qoq

CCB’s 3Q18 EBITDA of RM6.8m was a sharp improvement from RM2.9m in 2Q18, thanks to the above-mentioned tax holiday period. CCB’s 3Q18 EBITDA margin of 1.6% was above the <1% mark it racked up for the past 2 years. Nonetheless, 3Q18 core earnings were sequentially weaker by 34% qoq as the RM11m annual dividend income received from MercedesBenz Malaysia lifted 2Q18 core net profit.

Maintain HOLD With a Higher TP of RM2.00

We raise our FY18E core EPS forecasts by 7% to account for the strong 3Q18 earnings, which we believe is not sustainable. Elsewhere, we have also roll forward our valuation horizon to 2019 and increase our 12-month price target to RM2.00 (from RM1.95) based on 0.7x CY19E book value, implying a 2019E PER of 16x, which looks fair from a valuation perspective. Upside risks: stronger-than-expected sales / profit margins; downside risks: further decline in market share.

Source: Affin Hwang Research - 5 Nov 2018