9MFY20 PATAMI of RM98.1m (-52%) came in below our/consensus expectation at 49%/55% of full-year estimate due to lower-than-expected sales. As such, we cut our FY20-21E CNP by 32-30% and TP to RM1.80 (from RM2.65), based on unchanged 13x CY20E EPS. Maintain OP on above-industry profit margin and steady dividend yield of c.7%. We believe the negatives could have been priced in with its share price plunging by 30% YTD.

9MFY20 below expectations. 9MFY20 PATAMI of RM98.1m (-52%) came in below our/consensus expectation at 49%/55% of full-year estimates due to lower-than-expected sales. A 3rd interim DPS of 1.45sen (3QFY19: 2.75sen) was declared for the quarter, bringing YTD DPS to 7.45sen (9MFY19:10.75sen), below expectation (vs. our previous FY20E DPS of 14.7 sen).

YoY, 9MFY20 PATAMI plunged 52%, despite sales decreasing at a lower rate of 25%, largely due to: (i) contraction in EBIT margin by 3.8ppt to 7.3% from 11.1% in 9MFY19 following the outgoing Mazda CX-5 runout promotion as more sales incentives were given to clear inventories of this model, (ii) lower associates (-43%), 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 9,808 units (-35%) 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.

QoQ, 3QFY20 PATAMI surged 33%, despite marginal sales (+2%), thanks to: (i) expansion in EBIT margin by 0.8ppt to 5.8% from 5.0% in 2QFY20, contributed by higher margin sales of the all-new CX-5 and CX- 8, (ii) higher associates (+30%), particularly, from higher share of profit in Inokom Sdn Bhd, especially from better margin sales of the all-new CX-8, and (ii) lower effective tax rate at 17.4% (2QFY20: 26.0%). Overall weaker Mazda sales at 2,923 units (-6%) was due to minimal discounts being offered to the market as compared to competitors.

Exciting new launches starting 2QFY20. BAUTO had earlier launched the all-new Mazda 3 Sedan and Hatchback (CBU, July 2019), face-lifted and turbo variants of CX-5 (CKD, 22nd Oct 2019), all-new CX-8 (CKD, 13th November 2019), all-new CX-30 (CBU, 15th January 2020), 2020 Mazda CX-9, face-lifted Mazda 2 and 2020 Mazda MX-5 RF (3rd March 2020). BAUTO will introduce the face-lifted CX-3 (by 1QCY20), and allnew Mazda MX-30 (CY2021). We like BAUTO for its: (i) high margin sustained by the stream of all-new models, (ii) superior margins above industry peers (average profit margin of c.7% vs. peers of c.2%), and (iii) steady dividend yield of c.7%.

Cut FY20-21E CNP by 32-30% respectively, to reflect lower-thanexpected sales as we expect cautious spending on big-ticket discretionary items due to the Covid-19 outbreak. Following which, we have trimmed our expected DPS to 10.0 sen (from 14.7 sen) for FY20 and 12.9 sen (from 18.4 sen) for FY21 based on a dividend pay-out ratio of 85%.

As such, we cut our TP to RM1.80 (from RM2.65), based on unchanged 13x CY20E EPS (at -0.5SD of its historical 3-year Fwd. PER mean). Maintain OP as we believe the negatives could have been priced in with its share price plunging by 30% YTD. Risks to our call include: (i) economic downturn leading to lower-than-expected car sales volume, and (ii) unfavourable forex.

Source: Kenanga Research - 17 Mar 2020