9M18 PATAMI of RM82.9m (-14% YoY), came in below our and consensus expectations, accounting for 53%/59% of fullyear estimates due to lower-than-expected margin. As such, we cut our FY18E PATAMI by 18%, but keeping our FY19E PATAMI as we expect the lower margin outgoing Mazda CX-5 run-out programme will be terminated by the end of FY18. Maintain OUTPERFORM with unchanged TP of RM2.30.

9M18 below expectations. The reported 9M18 PATAMI of RM82.9m (- 14.4% YoY), came in below our and consensus expectations accounting for 53%/59% of full-year estimates due to the lower-than-expected margin due to higher-than-expected discount cost in the outgoing Mazda CX-5 run-out programme. A third interim DPS of 2.3 sen was declared for the quarter, bringing 9M18 DPS to 5.4 sen, which is within our expectation.

YoY, 9M18 PATAMI declined by 14.4% to RM82.9m mainly due to the contraction in PBT margin by 2.3pp to 8.7% from 11.0% in 9M17 attributed to the old Mazda CX-5 run-out programme as higher sales incentives were given for this model to clear the old stock prior to the launch of the all-new Mazda CX-5 model in October 2017 as well as from the share of loss from 30%-owned, Mazda Malaysia SB in the 1H18 due to the low production volume prior to the launch of the all-new Mazda CX- 5 model. The negative effect was mitigated by the strong performance in 3Q18 and subsequently, higher 9M18 revenue growth of 9% attributed to the higher total car sales at 11,981 units (+4%). Domestic operation’s car sales volume was lower at 7,789 units (-7%) as the bulk of the volume from the all-new Mazda CX-5 only came in 3Q18 due to the higher-thanexpected take-up rate for the premium soul red crystal colour. Whereas, Philippines operation continued its strong performance at 4,192 units (+33%) on higher sales of Mazda 3 models and maiden contribution from the all-new Mazda CX-5 and all-new Mazda CX-9.

QoQ, 3Q18 PATAMI surged 82.3% to RM40.5m underpinned by: (i) higher revenue (+19%) driven by the higher total car sales at 4,579 units (+15%) boosted by higher sales volume of the all-new Mazda CX-5 (total all-new CX-5 sold was at 45% of total 3Q18 car sales volume) as well as from the commencement of the all-new Mazda CX-5 export to Thailand, Indonesia, Philippines and Cambodia, (ii) expanded PBT margin by 2.9pp to 10.2% from 7.3% in 2Q18 attributed to the reduction in discounts for the run-out Mazda CX-5 programmes, and (iii) lower effective tax rate of 22.6% compared to 26.3% in the 2Q18.

Outlook. BAuto expects better sales for the rest of the year with the full quarterly contribution of the all-new Mazda CX-5 CKD units (currently at 3,199 units since launch), while supported by the Mazda G-Vectoring (GVC) variants of Mazda 3, 6, CX-3 and CX-9. For CY18, BAuto is looking to bring in the Mazda CX-8 (2QCY18 for CBU&CKD) and the allnew 2018 Mazda 6 CBU (3QCY18), while for CY19, BAuto is expected to introduce new generation of its flagship models of Mazda 3.

FY18E PATAMI cut by 18%. We cut our FY18E PATAMI by 18% to account for the lower-than-expected margin. We maintained FY19E PATAMI as we expect the lower margin outgoing CX-5 run-out programme to be terminated by the end of FY18.

Maintain OUTPERFORM with unchanged TP of RM2.30 based on unchanged 13x FY19E EPS, which is at undemanding valuation at -1.0 SD of its 3-year forward mean PER. We like BAUTO because of its: (i) solid earnings recovery with the launch of its flagship model, the all-new Mazda CX-5, (ii) superior margins, which is head and shoulders above industry peers (average profit margin of c.8% as compared to peers’ average at c.2%), and (iii) steady dividend yield of 4.5% with its net cash position, which accounts for 8% of market cap and strong 5% FCFE yield (FY18E). Risks to our call include (i) lower-than-expected car sales volume and, (ii) unfavorable forex.

Source: Kenanga Research - 13 Mar 2018