FY18 PATAMI of RM141.0m (+19%), beat our/consensus expectations, by 10%7% of full-year estimates due to the higher-than-expected unit sales. However, we made no changes to our FY19E NP as we believe that we have imputed sufficient unit sales assumption. Maintain OUTPERFORM with a higher TP of RM2.50 as we change our valuation year to CY19E (from TP of RM2.30 based on FY19E).

FY18 above expectations. FY18 PATAMI of RM141.0m (+19%) beat our and consensus expectations, by 10% and 7% of full-year estimates, respectively, due to the higher-than-expected unit sales. However, we made no changes to our FY19E NP of RM203.7m as we believe that we have imputed sufficient unit sales assumption. We introduced our FY20E NP of RM233.7m. A fourth interim DPS of 2.3 sen and a special DPS of 2.7 sen was declared for the quarter, bringing FY18 DPS to 10.3 sen, implying dividend yield of 4.4% and dividend pay-out of 85%, as expected.

YoY, FY18 PATAMI increased by 19% mainly from the: (i) higher revenue (+20%) attributed to the higher total car sales at 16,517 units (+12%), and (ii) higher associates (+53%) from the higher production volume of the all-new CX-5. Specifically, local operation's car sales volume was higher at 11,315 units (+7%) and Philippines arm continued its strong performance at 5,202 units (+25%). This was despite the contraction in PBT margin by 0.7ppt to 9.9% from 10.6% in FY17 attributed to the old Mazda CX-5 run-out programme and the share of loss from 30%-owned, Mazda Malaysia S/B in the 1H18 due to the low production volume prior to the launch of the all-new Mazda CX-5 model.

QoQ, 4Q18 PATAMI surged 44% to RM58.2m underpinned by: (i) expanded PBT margin by 2.7ppt to 12.9% from 10.2% in 3Q18 attributed to the termination of discount for the run-out Mazda CX-5 programmes, and (ii) higher revenue (+2%) from favourable sales mix albeit lower sales unit to 4,536 units (-1%) mainly from the sales of all-new Mazda CX-5 (all-new CX-5 contributed to 55% of total 4Q18 car sales volume).

Outlook. With the zero-rated GST starting 1st June 2018 (at average c.6% of price reduction), we expect a boost in car sales during this tax holiday transition period, although the expected introduction of SST may increase car prices depending on the new mechanism. BAuto expects better sales in FY19 mainly from the all-new Mazda CX-5 CKD units (currently at 4,831 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 all-new 2018 Mazda 6 CBU (3QCY18), while for CY19, BAuto is expected to introduce the new generation of its flagship models of Mazda 3. BAuto will also introduce the all-new Mazda CX-8 CKD in 2HCY19 and will not be launching the CBU models which are limited to diesel engine only.

Maintain OUTPERFORM with a higher TP of RM2.50 as we change our valuation year from FY19E to CY19E for a better comparison with its peers on the impact of zero-rated GST, which has been implemented on 1st June 2018. Our current valuation is based on 13x CY19E EPS (from TP of RM2.30, based on 13x FY19E EPS), which is at undemanding valuation at -1.0SD 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 6% with its net cash position, which accounts for 10% of market cap. and strong 9% FCFE yield (FY19E).

Risks to our call include (i) lower-than-expected car sales volume and, (ii) unfavorable forex.

Source: Kenanga Research - 13 Jun 2018