Cycle & Carriage Bintang (CCB) reported a 1Q19 core net loss of RM6.4m (vs RM2.9m core net loss in 1Q18). The loss was due to lower revenue (-25% yoy) and weaker EBITDA margins. Overall, the results was below our expectations. We reaffirm our SELL rating with a lower target price of RM1.18 (from RM1.48), based on 0.4x (from 0.5x; -2SD its 3-year mean) 2020E book value, given the mounting concerns over decreasing profit margins and the escalating competitive landscape moving forward.

Core Net Loss of RM6.4m in 1Q19

CCB’s 1Q19 revenue decreased by 25% yoy to RM293.2m due to lower vehicle sales (-27% yoy), cushioned by higher service revenue (+19% yoy). The Group also recorded a larger negative EBITDA of RM4.6m in 1Q19 (vs. negative EBITDA of RM2.3m in 1Q18), dragged by the (i) shift to lower margin mix from E-Class to the C, GLC and A-Class models, (ii) higher interest expenses and higher operating costs (+24% yoy). Sequentially, 1Q19 results was also weaker, affected by the above-mentioned factors.

Challenging Retail Environment; Plans to Diversify to Other Marques

We think the launch of the all-new Benz A-Class sedan will likely reinvigorate sales volume in the coming months, but the lower priced product mix could further erode margins for CCB. If conditions worsen, CCB has expressed the intention to distribute other car brands as part of its medium-to-long term strategy.

Reaffirm SELL With Lower TP of RM1.18

We cut our 2019-21E EPS by 41-87% after incorporating lower sales forecasts. In tandem, we reaffirm our SELL rating on CCB, with a lower target price of RM1.18 (from RM1.48) based on a 0.4x (from 0.5x; -2SD below 3-year average) 2020E book value. At 41x 2020E PER, valuation looks pricey. Upside risks: stronger-than-expected sales/profit margin.

Source: Affin Hwang Research - 24 Apr 2019