1Q19 PATAMI of RM50.3m (+149% YoY, -14% QoQ) came in within our/consensus expectations at 25%/24% of full-year estimates. BAuto expects to maintain its positive sales trajectory for the upcoming quarter as they maintain their zero-rated pricing for vehicles booked before 1st September 2018 (new SST implementation). Reiterate OUTPERFORM call with an unchanged TP of RM2.50.

1Q19 in line. 1Q19 PATAMI of RM50.3m (+149% YoY, -14% QoQ) came in within our/consensus expectations at 25%/24% of full-year estimates. First Interim DPS of 2.5 sen (1Q18:1.5 sen) was declared, as expected.

YoY, 1Q19 PATAMI surged 149% mainly driven by: (i) expansion in PBT margin by 5.8ppt to 13.9% from 8.1% in 1Q18 from the ending of old Mazda CX-5 run-out programme, (ii) higher revenue (+24%) attributed to the higher total car sales at 3,783 units (+10%), and (iii) higher associates (+>100%) from the higher production volume of the all-new CX-5. Specifically, local operation’s car sales volume was higher at 2,983 units (+26%) buoyed by the zero-rated tax holiday and all-new CX-5. However, this was partly offset by a drop in sales volume from the Philippines operations to 800 units (-26%) subsequent to the implementation of the Tax Reform for Acceleration and Inclusion (TRAIN) law in January 2018. The TRAIN law has caused an increase in excise tax (up to 7%) and consequently increased in car prices, thus affecting the demand for motor vehicles in the Philippines. Nevertheless, BAuto plans to preserve its sales volume by increasing its Philippines dealerships to 21 from the current 18 dealerships by the end of FY19.

QoQ, 1Q19 PATAMI decreased by 14% underpinned by: (i) lower revenue (-15%), attributed to the lower total car sales (-17%), (ii) lower associates (-65%), and (iii) higher effective tax rate at 23.3% (4Q18:21.1%). The lower revenue and associates were affected by the supply constraint from 30%-owned associates, Mazda Malaysia S/B (MMSB) from the unexpected surges in demand for passenger cars during the zero-rated tax holiday.

Outlook. With the introduction of new SST in 1st September 2018, (vehicles will be charged 10% in sales tax) we expect weaker car sales as consumers are still adjusting to the new pricing system, which may see a price hike of 1-3% for CBU version (compared to 6%-rated GST); however, CKD version will see a price decrease of 1-3%, attributed to the better localisation compliance under certain tax incentive program. Nevertheless, BAuto will maintain its zero-rated pricing for vehicles booked before 1st September 2018 and expects better sales in FY19 mainly from the all-new Mazda CX-5 CKD units (currently at 6,970 units since launching), while supported by its other variants. For CY18, BAuto recently launched Mazda CX-3 face-lifted and Mazda 6 face-lifted (CBU), while for CY19, BAuto is expected to introduce the new generation of its flagship models of Mazda 3 and all-new Mazda CX-8 CKD in 2HCY19.

Maintain OUTPERFORM with an unchanged TP of RM2.50 based on 13x CY19E EPS, which is at undemanding valuation of -1.0SD of its 3- year forward historical mean PER. We like BAUTO because for 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 at 7%. Risks to our call include (i) lower-than-expected car sales volume and, (ii) unfavorable forex.

Source: Kenanga Research - 14 Sept 2018