YoY, 1HFY20 PATAMI plunged 43%, despite sales decreasing at a lower rate of 16%, largely due to: (i) contraction in EBIT margin by 3.5ppt to 8.0% from 11.5% in 1HFY19 following the outgoing Mazda CX-5 run-out promotion as more sales incentives were given to clear inventories of this model, (ii) lower associates (-34%), and (iii) the strengthening of the Japanese Yen against the Malaysian Ringgit and Philippine Peso which offset gross profit margin. Overall, the weaker results came from: (i) weaker Mazda sales at 6,885 units (-24%) after back-orders were filled from the zero-rated tax discount period, particularly for its outgoing CX-5, (ii) weaker associates’ contribution on lower production volume as Mazda Malaysia S/B (MMSB) ceased the outgoing CX-5 production since July 2019 and switched production to the all-new CX-5 and all-new CX-8 starting August 2019, and (iii) delayed order delivery for the all-new CX-5 and all-new CX-8 due to pricing approval issues.

YoY, 2QFY20 PATAMI plunged 60%, despite sales decreasing at a lower rate of 15%, largely due to contraction in EBIT margin by 5.5ppt to 5.0% from 10.5% in 1QFY20 as the group ramped up promotion for the outgoing Mazda CX-5 with more sales incentives given to clear inventories before starting the all-new models delivery in the last week of October 2019. This was worsened by: (i) lower associates (-24%), and (ii) higher effective tax rate at 26.0% (1QFY20: 20.9%).

Philippines car sales eyeing all-new CX-8. The 60.4%-owned Philippines operation continued to record weak unit sales at 1,231 units (-18% YoY) subsequent to the implementation of the Tax Reform for Acceleration and Inclusion (TRAIN), but stronger QoQ sales at 704 units (+34%) with the resumption in delivery of all-new models of Mazda 3 and Mazda CX-3 in 2QFY20. The recently launched all-new CX-8 is highly anticipated in the Philippines market which is expected to sell c.100 units/month and should be able to support and mitigate the TRAIN impact while driving up MMSB’s export sales contribution.

Cut FY20-21E CNP by 9-3%. We cut our FY20 and FY21E CNP by 9% and 3%, respectively, to reflect lower-than-expected margin. Following which, we have trimmed our DPS to 14.7 sen (from 16.2 sen) for FY20E and 18.4 sen (from 19.0 sen) for FY21E based on a dividend pay-out ratio of 85%.

As such, we cut our TP to RM2.65 (from RM2.75), based on unchanged 13x CY20E EPS (at -0.5SD of its historical 3-year Fwd. PER mean). Nevertheless, we believe its 2HFY20 prospect could be better than the first half, riding on the recently launched face-lifted/turbo CX-5, the all-new CX-8, and all-new CX-30. Hence, maintain OUTPERFORM.

We like BAUTO for its: (i) expected earnings recovery from the stream of all-new models, (ii) superior margins above industry peers (average profit margin of c.9% vs. peers of c.2%), and (iii) steady dividend yield of c.7%. Risks to our call include: (i) lower-than-expected car sales volume, and (ii) unfavourable forex.

Source: Kenanga Research - 11 Dec 2019