Cycle & Carriage Bintang (CCB) reported a disappointing set of results – 1H19 core net loss of RM16.6m (vs. RM2.7m core net profit in 1H18), was below our expectations. The weaker performance was due to lower revenue, reduced margins and the absence of the annual dividend income of RM11.2m. In light of the downbeat 1H19 results and difficult trading environment, we now project a wider core net loss of RM24.8m (previous profit forecast at RM0.7m) for 2019 and lower our price target to RM1.04 (from RM1.18). Reiterate SELL.

1H19 Core Net Losses of RM16.6m, Below Expectations

Excluding the one-offs, CCB’s sharp earnings decline in 1H19 was attributable to: (i) lower revenue, (ii) reduced margins and (iii) the absence of the annual dividend income of RM11.2m (after disposing the 49% stake in Mercedes Benz Malaysia SB). 1H19 revenue declined by 23% yoy to RM603.7m on lower vehicle sales (-27% yoy), partially cushioned by higher service revenue (+19% yoy). Mercedes-Benz (Merc) 6M19 sales volume fell 19% yoy to 5.6k units and we expect the sales volume to moderate in 3Q19, in view of the accelerated purchases made during the tax holiday period in June-Aug 2018 and the Hari Raya promotions.

Core Loss Widens in 2Q19: Weaker EBITDA Margin

Sequentially, CCB’s 2Q19 core net loss widened to RM10.6m (1Q19 core net loss: RM6.1m) as CCB recorded a larger negative EBITDA of RM9.7m (vs. negative EBITDA of RM4.3m in 1Q19) as margins were squeezed even further by: (i) a shift to a lower-margin sales mix, (ii) intense competition among Mercedes-Benz dealers and (iii) higher operating expenses.

Reiterate SELL With a Lower 12-month TP of RM1.04

In view of the wider-than-expected loss in 1H19, we are projecting a 2019 core net loss of RM24.8m (core net profit of RM0.7m previously), to account for the lower Merc sales volume and weaker margins. In tandem, we lower our 12-month TP to RM1.04 (from RM1.18) based on a 0.4x 2020E book value (close to 2SD below the 3-year average). Upside risks: stronger-than-expected sales/profit margins, easing of competition among dealers.

Source: Affin Hwang Research - 1 Aug 2019