1H19 PATAMI of RM124.2m (+193%) came in at 61%/62% of our/consensus full-year estimates, which we deemed in line as we expect sales to normalize in 2H19. BAUTO recorded an all-time high for quarterly Malaysian sales in 2Q19, recovering from the supply constraint during the first two months of the zero-rated tax holiday. Reiterate OP with unchanged TP of RM2.50.

1H19 within expectations. 1H19 PATAMI of RM124.2m (+193%) came in at 61%/62% of our/consensus full-year estimates, which we deemed in line as we expect sales to normalize in 2H19. A 2 nd Interim DPS of 3.75 sen (2Q18:1.60 sen) was declared for the quarter, which bring 1H19 DPS to 6.25 sen (1H18:3.10 sen), as expected.

YoY, 1H19 PATAMI surged 193% mainly driven by: (i) expansion in PBT margin by 6.1ppt to 13.8% from 7.7% in 1H18 from the ending of old Mazda CX-5 run-out programme, (ii) higher revenue (+36%) attributed to the higher total car sales at 9,017 units (+22%), (iii) higher associates (+>100%) from the higher production volume of the all-new CX-5, and (iv) lower effective tax rate at 22.0% (1H18: 26.6%).

Specifically, local car sales volume was higher at 7,518 units (+53%) 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 operation to 1,499 units (-40%) subsequent to the implementation of the Tax Reform for Acceleration and Inclusion (TRAIN) law in January 2018.

QoQ, 2Q19 PATAMI jumped 47% buoyed by: (i) higher revenue (+42%), attributed to the higher total car sales (+38%), mainly from the all-time high for quarterly Malaysian sales in 2Q19 at 4,535 units (+52%) from the supply recovery after a constraint during the first two months of the zero- rated tax holiday, (ii) strong associates (+>100%) from the higher production volume of the all-new CX-5, and (iii) lower effective tax rate at 21.1% (1Q19: 23.3%).

Outlook. BAUTO will maintain its zero-rated pricing for vehicles booked before 1st September 2018 (new SST implementation) and expects better sales in FY19 mainly from the all-new Mazda CX-5 CKD units (back- logged booking of 4k units), while supported by its other variants. For CY18, BAUTO recently launched the face-lifted Mazda CX-3 and face- lifted Mazda 6 (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. Elsewhere, in Philippines, the TRAIN law has caused an increase in excise tax (up to 7%) and consequently increased car prices, thus affecting the demand for motor vehicles. 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.

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 compared to average net profit growth of 30% for the next 2 years.

We like BAUTO for its: (i) solid earnings recovery with the launch of the all-new Mazda CX-5, its flagship model, (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) unfavourable forex.

Source: Kenanga Research - 13 Dec 2018