9M17 PATAMI of RM96.8m came in below expectations made up only 62%/49% of our/consensus estimates. The negative deviation was due to weaker-than-expected sales from both operations. A 2.75 sen interim DPS was declared, broadly within expectations. Post-results, we cut our FY17E/FY18E PATAMI by 9.8%/10.1% on the back of weaker unit sales expectations. Downgrade to MARKET PERFORM with a lower TP of RM2.11.

9M17 results were below expectations, as the group’s PATAMI of RM96.8m made up only 62%/49% of our/consensus estimates. The negative deviation was due to weaker-than-expected sales from both Malaysian and Philippines operations hampered by weak consumer sentiment, intense competition and delays in delivery lead time. A 2.75 sen interim DPS was declared, bringing YTD DPS to 8.50 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, 9M17 revenue of RM1,305.5m fell by 17.2% YoY as domestic sales (-27.4% YoY unit sales to 8.4k) 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 (-11.7% YoY unit sales to 3.2k units) for this reason. In addition, the impact from the temporary closure of its contract assembler’s plant during 1H17 contributed to some extension in delivery lead time. However, the result from the above was cushioned by better product mixes in both the domestic and Philippines market. Group PATAMI registered at RM96.8m (-33.8% YoY) with a lower PATAMI margin of 7.4% from 6.5% previously, due to the suppression by prolonged forex weakness towards JPY rates on operating expenses.

QoQ, sales fell by 28.4% QoQ to RM338.7m, owing to the decline in unit sales in the domestic market due to the weakening consumer sentiment as well as slower recovery in vehicle delivery and sales recognition with the temporary closure of a contract assembler’s plant in the 1H17. However, this was mitigated with improved EBIT margin of 11.7% from 9.0% previously, with successful management of operating costs. As a result, the group PATAMI margin improved to 7.4% from 6.5% previously.

While the current environment appears trying with the slower- than-expected sales, we expect BAUTO earnings will be supported by, (i) relatively stable margins benefiting from the lower import duties from FTA with Japan, (ii) price increase up to RM6,000 for Mazda 2017 variants, and (iii) 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 a safer bet to pull through the extended weakness in consumer sentiment as they are usually less sensitive to the rise in living expenses. Furthermore, the listing of Bermaz Auto Philippines Inc. should accelerate the group’s penetration into the Philippines market, where robust growth in its automotive market is anticipated.

Post-results, we cut our FY17E/FY18E PATAMI by 9.8%/10.1% on the back of weaker unit sales expectations. Downgrade to MARKET PERFORM from OUTPERFORM with a lower TP of RM2.11 (from RM2.36, previously) based on our revised FY18E EPS of 17.0 sen on our unchanged targeted of 12.4x PER.

Source: Kenanga Research - 15 Mar 2017