1Q18 PATAMI of RM20.2m (-51% YoY,-9% QoQ), appears to be below both our/consensus expectations at 11%. However, we consider the results to be within expectation as we expect a much stronger upcoming quarter with the expected launch of the new Mazda CX-5. Maintain OUTPERFORM with a higher target price of RM2.40 (from RM2.05, previously against FY18E EPS of 16.7 sen), as we roll over our valuation base year to FY19E EPS of 19.1 sen.

Expecting stronger upcoming quarters. 1Q18 PATAMI of RM20.2m (-51% YoY,-9% QoQ) appear to be below both our/consensus expectations at 11% but we consider the results to be within expectations as we expect a much stronger upcoming quarter with the expected launch of its bread-and-butter model, the new Mazda CX-5 CKD units (in October 2017). A first interim DPS of 1.5 sen was declared, broadly within our expectation. We expect the group to pay a total net DPS of 13.5 sen for FY18.

YoY, 1Q18 revenue fell by 21% as domestic division saw lower volume of car sales by 30% to 2,362 units, as the consumers are holding back purchases, awaiting the most anticipated new Mazda CX-5, which is expected to be launched in October 2017. Additionally, competition during this period was also highly intense due to new model launches by competitors, unlike the previous year. A similar effect was also experienced in the Philippines market (-7% to 1,075 units). Correspondingly, EBIT was lower by 38% with a compressed EBIT margin of 8% (-2.4pts), due to the suppression from prolonged forex weakness towards JPY rates on operating expenses. Coupled with lower associates’ contribution (MMSB) by 87%, and higher effective tax rate of 27% (1Q17: 25%), PATAMI slumped by 51%.

QoQ, 1Q18 revenue was higher by 11%, attributed to higher car sales from both operations (+7% to 3,437 units, with Mazda CX-5 contributing 27% of the volume) attributed to the aggressive sales promotion activities and improvement in supply constrains issue for certain models. Correspondingly, EBIT was higher by 17%, with slightly expanded EBIT margin of 8% (+0.4pts) with improved MYR against JPY at RM3.87/100JPY (as at 28th April 2017:RM3.90/100JPY). Nonetheless, PATAMI declined by 9%, attributed to lower associates’ contribution by 88%, due to lower unit sales/margin from the phasing out of the current CX-5 model and higher effective tax rate of 27% (4Q17: 21%).

Outlook. We believe the recent launches in 2017 of the GVC series of Mazda MX-5 RF, face-lifted Mazda 3, Mazda CX-3, Mazda 6, and Mazda CX-9 as well as expected launch of bread-and-butter model, the new Mazda CX-5 CKD units in October 2017 (c.35% of the group volumes) will reinvigorate market demand in the upcoming quarters. Moving forwards, earnings growth will be supported by: (i) High potential value to be unlocked with the proposed listing of its Philippines subsidiary where robust growth in its automotive market is anticipated, (ii) Higher average selling price of c.4% for Mazda 2017 variants, and (iii) Higher CKD composition with the forthcoming launch of Mazda CX-5.

Post results, we made no changes to our FY18E assumptions; however, we revised our FY19E earnings assumptions higher by 7% on expectation of higher composition of CKD units.

Maintain OUTPERFORM with a higher target price of RM2.40 (from RM2.05, against FY18E EPS of 16.7 sen), as we roll over our valuation base year to FY19E (EPS of 19.1 sen) on unchanged PER of 12.4x. Dividend yield of 7% on the back of sturdy balance sheet and strong operating cash flow should continue to provide support to the share price. Key risks include lower-than-expected vehicles sale and adverse currency fluctuations.

Source: Kenanga Research - 12 Sept 2017