Cycle & Carriage Bintang (CCB) will cease to be the 49%-stake shareholder in Mercedes-Benz Malaysia SB (MBM) as Daimler AG (owns 51%-stake in MBM) looks to acquire the remaining stake for RM66m. We are negative on this disposal, as it will strip off CCB’s recurring dividend income of RM11.2m. As such, we slash our EPS forecasts by 38-57% in FY19-20E and cut our TP to RM1.48 from RM2.00, based on 0.5x CY19E book value. Downgrade to SELL.

Cease to be 49%-stakeholder in MBM, Loses Annual Dividend Income

CCB will cease to be a shareholder in MBM (the entity manages the wholesale distribution of Mercedes-Benz (Merc) vehicles in Malaysia) as Daimler AG (DAG) has exercised its call option on 66m MBM shares held by CCB. Consequently, CCB is obliged to sell its 49% stake in MBM to DAG. No expected gain/losses from this disposal as the consideration is on par to the cost of investment in 2003. The disposal proceeds will be used for (i) working capital and (ii) repayment of borrowing. Following the disposal, CCB will no longer be entitled to the annual dividend income of RM11.2m (contributed c.118% FY17 core net profit). Post disposal, CCB will remain as the leading Merc dealer with the largest network in Peninsular Malaysia.

Positive Uptick in Margins But Challenges Remains

We think CCB’s profitability will continue to face headwinds from the (i) intense competition from other Merc dealers and internally, the (ii) higher capex (building of Sungei Besi showroom)/ opex commitment (mainly staff costs, professional fees, marketing and promotional expenses). Nonetheless, the recent shift towards higher margin mix (from lowermargin cars) sparks hope for an uptick in margins, we believe.

Core EPS Downgrade, Maintain HOLD

Following the disposal, we cut core EPS down by 38-57% over FY19-20E to reflect the absence of the annual dividend income. In tandem with the earnings downgrade, we lower the target price to RM1.48 from RM2.00, based on 0.5x CY19E book value (from 0.3x) due to the challenging outlook. Downgrade SELL. Upside risks: stronger-than-expected sales/profit margins.

Source: Affin Hwang Research - 4 Dec 2018