6M17 PATAMI of RM71.7m was below expectations due to weaker-than-expected sales and higher operating expenses from unfavourable forex exposures. A 2.75 sen interim DPS was declared, broadly within expectations. The proposed listing of Bermaz Auto Philippines Inc. (BAP) in the Philippines is expected to accelerate the group’s penetration into the market. Post-results, we cut our FY17E/FY18E PATAMI by 10%/11% in lieu of weaker sales and higher forex exposure assumptions. Maintain OP with a lower TP of RM2.36 (from RM2.67, previously).

6M17 results were below expectations, as the group’s PATAMI of RM71.7m made up 42%/36% of our/consensus estimates. The negative deviation was due to softer-than-expected demand dragged by weak consumer sentiment, intense competition and delays in delivery lead time. Unfavorable forex exposure led to further erosion of profit margins. A 2.75 sen interim DPS was declared, bringing YTD DPS to 5.75 sen. We deem this as broadly in line with our expected total net DPS of 14.0 sen as we anticipate special dividends given the recent news flow from the management.

YoY, 6M17 revenue of RM966.8m fell by 8% as domestic sales (-18% unit sales to 6.4k) was underpinned by weakness in consumer sentiment. Competition during this period was also highly intense from new model launches by competitors, unlike the previous year. A similar effect was experienced in the Philippines market (-6% unit sales to 2.1k units) for this reason. In addition, the impact from the temporary closure of the group’s contract assembler’s plant during 1Q17 contributed to some extension in delivery lead time in 2Q17. However, the result from the above was cushioned by better product mixes in both the domestic and Philippines market. Group PATAMI registered at RM71.7m (-32% YoY) with a lower PATAMI margin of 7.4% (-2.6 pts) due to the suppression by prolonged forex weakness towards JPY rates on operating expenses.

QoQ, sales fell by 4% owing to the decline in unit sales in the domestic market in lieu of the dampening consumer sentiment as well as slower vehicle delivery and sales recognition with the temporary closure of a contract assembler’s plant. However, this was mitigated by stronger unit sales in the Philippines market. Group net earnings fell by 26% on the back of unfavorable forex rates.

While the current environment appears trying with the slower-thanexpected recovery in consumer sentiment, we are still optimistic on BJAUTO’s prospect as it appears to be the least affected by the macroeconomic headwinds in comparison to peers, on the back of: (i) relatively stable margins benefiting from the lower import duties from FTA with Japan, and (ii) attractive new model such as CX3-CKD, face-lifted CX5, 2x2 Turbo CX5 (Diesel) and Mazda 6 (Diesel). In addition, we believe the group’s targeted customer base of middle-income and high-income groups will be the first to pull through from the extended weakness in consumer sentiment as they are usually less sensitive to the rise in living expenses. Furthermore, the listing of BAP should accelerate the group’s penetration into the Philippines market, where robust growth in its automotive market is anticipated. (Note: Please refer to the overleaf for commentary on the announcement on the proposed listing of BAP.)

Post-results, we cut our earnings expectations of FY17E/FY18E by -10%/- 11% to account for weaker unit sales expectations. We also account for an increase in selling prices by Jan 2017, which was expressed by the management. We further revise our average exchange rate assumption of RM3.80/100 JPY for FY17E and FY18E to RM3.90/100 JPY and RM3.85/100 JPY, given the adverse trends indicated by prevailing rates. With our adjustments to earnings, we revise our DPS expectation for FY18E to 15.0 sen (from 18.0 sen, previously).

Maintain OUTPERFORM with a lower TP to RM2.36 (from RM2.67, previously) based on our revised FY18E EPS of 19.0 sen on our unchanged targeted of 12.4x PER.

Source: Kenanga Research - 9 Dec 2016