Cycle & Carriage Bintang (CCB) delivered a decent set of results - 2018 core net profit of RM9.4m (vs. 2017 core net loss of RM1.7m) tracked above our expectations due to higher-than-expected margins. However, we think the margins are not sustainable due to the gradual shift to lower-margin models given competition among MercedesBenz’s dealers and other luxury marques. As such, we reiterate our SELL rating with an unchanged 12-month TP of RM1.48.

2018 Core Net Profit Turned Positive; Ahead of Expectation

CCB’s 2018 headline net profit of RM22.3m was a strong turnaround from the RM12.5m net loss in 2017. The stronger earnings were driven by the receipt of RM12m in insurance compensation and dividend income of RM11.2m from Mercedes-Benz Malaysia (MBM). Adjusting for the one-offs, CCB’s 2018 core net profit rose to RM9.4m (from a 2017 core net loss of RM1.7m), ahead of expectation (105% of our full-year forecast) due to higher-than-expected margins. The EBITDA margin saw a 2ppt increase to 0.9% in 2018, thanks to the zero-rated goods and services tax period (3Q: June-August 2018) and a variable incentive received in 4Q18 for hitting annual sales targets, we believe.

4Q18 core net profit declined by 24.6% qoq on lower revenue/higher tax

CCB’s 4Q18 core net profit fell by 24.6% qoq to RM3m due to: (i) lower revenue (-29.4%) on lower unit sales post the tax holiday period; and (ii) higher taxation (+22ppt to 41% in 4Q18), although this was partly cushioned by a higher EBITDA margin (+0.9ppt to 2.5%) on recognition of variable incentives.

CCB Is Unlikely to Exit Retail Business, in Our View

The Edge Weekly reported that CCB could exit the retail operations of Mercedes-Benz cars, focusing on selling spare parts and servicing Mercedes-Benz vehicles in Malaysia. We think this strategy is not feasible, considering the combined 3S theme (sales, spare parts and after-sales services) plays an integral role in a one-stop centre (inseparable). CCB has also said that it remains committed to being the partner of choice of MBM – to grow alongside MBM in growing the Mercedes-Benz brand in Malaysia’s luxury car segment.

Source: Affin Hwang Research - 27 Feb 2019