Due to be released by 2nd week of March 2019, we expect 3Q19 PATAMI of c.RM75m (+2% QoQ, +86% YoY) buoyed by the stronger local Mazda sales in 3Q19 at 4,945 units (+3% QoQ, +64% YoY), based on MAA data. This implied 9M19 PATAMI of c.RM199m (+141% YoY) which is at 98%/91% of our/consensus full-year estimates. As such, we upgrade our FY19-20E CNPs by 15-10% to reflect the stronger local unit sales. Reiterate OP with a higher TP of RM2.80 (from RM2.50).

Expecting stronger 3Q19 performance. We expect 3Q19 PATAMI of c.RM75m (+2% QoQ, +86% YoY) buoyed by the stronger local Mazda sales in 3Q19 at 4,945 units (+3% QoQ, +64% YoY), based on MAA data, mainly due to continue recovery in supply of the all-new CX-5 after a supply constraint (under 30%-owned associates, Mazda Malaysia S/B (MMSB)) during the first two months of the zero-rated tax holiday. The 3Q19/ 9M19 results are due to be released by 2nd week of March 2019. Our assumption for the 3Q19 PATAMI is based on the vehicles average selling price for the past three quarters. This implies 9M19 PATAMI of c.RM199m (+141% YoY) which is at 98%/91% of our/consensus full-year estimates as delivery of the back-logged all-new CX-5 continued to record stronger take-up rate. The group’s 9M19 local Mazda sales is at 13,077 units (+64%), based on data from Malaysian Automotive Association (MAA). Note that, c.80% of the 3Q19 unit sales was contributed by the all-new Mazda CX-5.

Philippines operation challenging outlook. BAUTO’s Philippines market will continue to be impacted by the Tax Reform for Acceleration and Inclusion (TRAIN) law, effective January 2018. 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 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. Note that, 60.4%-owned, BAUTO Philippines recorded slower sales for 6M19 at 1,499 units (-40%), and we expect flattish growth for the 2H of the year.

Outlook. BAUTO expects better sales in FY19 mainly from the all-new Mazda CX-5 CKD units (back-logged booking of 3k units), while supported by its other variants. For CY18, BAUTO has 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.

Upgrade FY19-20E CNPs by 15-10%. We upgrade our FY19-20E CNPs by 15-10% to reflect the stronger local unit sales (upgrade from 12-12.5k units to 16-16.5k units for FY19-20E).

Maintain OUTPERFORM with a higher TP of RM2.80 (from RM2.50) based on unchanged 13x CY19E EPS, which is at undemanding valuation of -0.5SD of its 3-year forward historical mean PER compared to average net profit growth of 40% for the next 2 years.

We like BAUTO for its: (i) solid earnings recovery buoyed by the all-new Mazda CX-5, (ii) superior margins, which are head and shoulders above industry peers (average profit margin of c.8%, 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 - 08 Mar 2019