Muscle Up for Future Prospects

We maintain our HOLD rating on Cycle & Carriage Bintang Bhd (CCB) with an unchanged target price of RM1.95, based on 0.7x 2018E book value. The heightened competition and the shift in demand towards a lower-margin model mix are likely to erode CCB’s profit margins. Nonetheless, we expect these negatives to be mitigated by the RM11.2m dividend income from its 49% stake Mercedes-Benz Malaysia and improvement in sales performance in both the retail and aftersales markets to lift 2018E earnings.

Mercedes-Benz Remains the Leading Premium Brand in Malaysia

The recent 1Q18 saw MBM vehicle sales achieve 13.2% yoy growth, buoyed by healthy demand for its existing model pipeline, which is in tune with the lifestyle of Malaysia’s rich. However, we believe Merc’s sales performance in 2018 will be similar to last year’s given that the model pipeline from Merc is expected to be limited.

Margins Will Remain Suppressed in 2018-20E

We believe EBIT margins are unlikely to return to healthy levels (3.5% in 2016) at this juncture, taking into account: the 1) the intense competition from other Merc dealers; 2) shift in demand towards lower-priced models; and 3) new capex/opex commitments (mainly higher staff costs, repair and maintenance costs and marketing and promotion expenses) over 2018-20. CCB will continue to refurbish all Autohauses over the next 3 years, to comply with the Mercedes-Benz Presentation System (MPII) and to reflect the new Merc Corporate Identity (CI). Elsewhere, the Group is aiming to solid its footprint in the Southern region of Klang Valley through the Cheras outlet (completed in 1Q17) and establishing another 3S outlet at the Sungei Besi site by 2020 to cater the corporate demand of the upcoming Bandar Malaysia.

Maintain HOLD Rating and TP of RM1.95

We maintain our HOLD rating on CCB with an unchanged target price of RM1.95. Valuation is based on 0.7x FY18E book value (2 SD below 5-year average), implying a 2019E PER of 14x, which we believe is fair. Upside risks: stronger-than-expected sales / profit margins; downside risks: further decline in market shares.

Source: Affin Hwang Research - 30 Oct 2019