Due to be released this week, we expect its 4Q19 PATAMI to chalk between RM45-50m, lower compared to RM81.0m in 3Q19 and RM58.2m in 4Q18. We attributed this to the weaker local Mazda sales at 3,008 units (-39% QoQ; -8% YoY) after fulfilling back-orders from zero-rated tax discount period in the previous quarter. Nevertheless, we expect sales volume to normalize in the upcoming quarters, especially with the incoming all-new Mazda CX-8 (CKD). Maintain OP with a TP of RM2.85.

Expecting a weaker 4Q19. We expect 4Q19 PATAMI to come in between RM45-50m, weaker compared to RM81.0m in 3Q19 (-38-44% QoQ) and RM58.2m in 4Q18 (-14-23% YoY), due to be released within this week. We attributed this to the weaker local Mazda sales at 3,008 units (-39% QoQ, -8% YoY), based on MAA data, after fulfilling backorders from the zero-rated tax discount period, particularly for its allnew CX-5, in the previous quarter, as well as expected lower associates’ contribution from the lower production volume of the all-new CX-5. Our assumption for the 4Q19 PATAMI is based on vehicles’ average selling price for the past three quarters. Note that, c.65% of the 3Q19 unit sales was contributed by the all-new Mazda CX-5. This will bring FY19 PATAMI to RM250-255m (+79-82% YoY) which is within expectations at 100-102% of both our/consensus full-year estimates. The group’s FY19 local Mazda sales is 16,085 units (+43% YoY), based on data from Malaysian Automotive Association (MAA). Nevertheless, we expect its sales volume to normalize (absence of one-off major event, such as zero-rated tax holiday) in the upcoming quarters, especially with the introduction of all-new Mazda CX-8 (CKD) for the Malaysian and Philippines markets.

Challenging outlook in Philippines operation. BAUTO’s Philippines market will continue to be impacted by the Tax Reform for Acceleration and Inclusion (TRAIN) law, effective since January 2018. The TRAIN law has caused an increase in excise tax (up to 7%) and consequently, higher car prices, thus affecting the demand for motor vehicles in the Philippines. Nevertheless, BAUTO plans to preserve its sales volume by increasing its dealerships there to 21 from the current 18 dealerships by the end of FY19. Note that, 60.4%-owned BAUTO Philippines recorded recovery in sales volume in 3Q19 at 1,018 units (+46%), but we expect flattish growth for 4Q19. Total sales unit for 9M19 was 2,517 units (-40%).

Exciting new launches. In CY18, BAUTO launched the face-lifted Mazda CX-3 and face-lifted Mazda 6 (CBU). For CY19, BAUTO will introduce the all-new Mazda 3 SkyActivX (CBU) end-2QCY19, all-new Mazda CX-8 (CKD) and all-new Mazda CX-30 (CBU) in 2HCY19.

Reiterate OUTPERFORM with a Target Price of RM2.85 based on 13x CY19E EPS, 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 7%.

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

Source: Kenanga Research - 11 Jun 2019