9M19 PATAMI of RM205.2m (+148%) came in above our/consensus expectations, at 87%/93% of full-year estimates, due to better-than-expected margin despite having to absorb the SST rate for back-logged orders prior to 1st September 2018. As such, we upgrade FY19E CNP by 6%, and increased our TP to RM2.85 (from RM2.80) based on unchanged 13x CY19E EPS. Reiterate OP.

9M19 above expectations. 9M19 PATAMI of RM205.2m (+148%) came in above our/consensus expectations, at 87%/93% of full-year estimates, due to better-than-expected margin, despite having to absorb the SST rate for back-logged orders prior to 1st September 2018. A 3rd interim DPS of 4.5 sen was declared for the quarter, which bring 9M19 DPS to 10.75 sen (9M18: 5.40 sen), as expected.

YoY, 9M19 PATAMI surged 148% mainly driven by: (i) expansion in PBT margin by 4.8ppt to 13.5% from 8.7% in 9M18 from the ending of old Mazda CX-5 run-out programme, (ii) higher revenue (+37%) attributed to the higher total car sales at 15,078 units (+26%), (iii) higher associates (+>100%) from the higher production volume of the all-new CX-5, and (iv) lower effective tax rate at 21.5% (9M18: 24.8%). Specifically, local car sales volume was higher at 12,561 units (+61%) buoyed by the zero-rated tax holiday discounts period and the all-new CX-5 which contributed 68% of its local unit sales. However, this was partly offset by a drop in sales volume from the Philippines operation to 2,517 units (-40%) subsequent to the implementation of the Tax Reform for Acceleration and Inclusion (TRAIN) law.

QoQ, 3Q19 PATAMI jumped 10% mainly due to higher revenue (+13%), attributed to the higher total car sales (+16%), boosted by the all-time high quarterly Malaysian sales in 3Q19 at 5,043 units (+11%) as they were still fulfilling the back-orders from the zero-rated tax discounts period, particularly for its all-new CX-5 which contributed 65% of its local unit sales. This was partly supported by: (i) the recovery in sales volume in Philippines at 1,018 units (+46%), (ii) strong associates (+3%) from the higher production volume of the all-new CX- 5, and (iii) lower effective tax rate at 20.6% (2Q19: 21.1%).

Outlook. For CY18, BAUTO has launched the face-lifted Mazda CX-3 and face-lifted Mazda 6 (CBU). For CY19, BAUTO will introduce the allnew Mazda 3 SkyActivX in 2QCY19, all-new Mazda CX-8 CKD, and allnew Mazda CX-30 (CBU) in 2HCY19. Elsewhere, in Philippines, the TRAIN law resulted in 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 FY19E CNP by 6%. We upgrade our FY19E CNP by 6% to reflect the stronger-than-expected margin. Nevertheless, we made no changes to our FY20E CNP as we have made sufficient adjustment in relation to SST rate.

Reiterate OUTPERFORM with a higher TP of RM2.85 (from RM2.80) based on unchanged 13x CY19E EPS, which is at -0.5SD of its 3-year forward historical mean PER.

We like BAUTO for its: (i) solid earnings recovery buoyed by the all-new Mazda CX-5, (ii) superior margins, above industry peers (average profit margin of c.8% vs. peers at c.2%), and (iii) steady dividend yield at 8%.

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

Source: Kenanga Research - 14 Mar 2019