BAUTO guided for upbeat sales in FY23 for Mazda, Peugeot and Kia. Its current total booking backlogs of 10k units is unchanged from three months ago - indicating that deliveries have been replenished with new bookings. Meanwhile, we expect BAUTO’s 2QFY23 net profit to come in at RM55m-RM65m, up 10% to 30% sequentially. We raise our FY23-24F net profit forecasts by 19- 14%, lift our TP by 15% to RM2.65 (from RM2.30) and reiterate our OUTPERFORM call.

Highlights. We came away from a recent engagement with BAUTO feeling even more upbeat on its prospects. The key takeaways are as follows:

1. BAUTO guided for upbeat sales in FY23 for Mazda at 13k units (+8% YoY), Peugeot at 2k units (+107% YoY) and Kia at 2k (+456% YoY), against our assumptions of 12.1k units (+1% YoY), 1k units (+4% YoY) and 1k units (+178% YoY), respectively. As such, we raise our assumptions to 13k units for Mazda (+7%), and 2k units for both Peugeot (+100% YoY) and Kia (+100% YoY). For FY24, assuming the sales momentum is to sustain, we raise our assumptions to 13.7k units for Mazda (+5% YoY), and 2.1k units for both Peugeot (+5% YoY) and Kia (+5% YoY), from 13k units (+7% YoY), 1.5k units (+50% YoY) and 1.5k units (+50% YoY) previously.

2. Its current total booking backlogs of 10k units (85% from Mazda) is unchanged from three months ago, indicating that deliveries have been replenished with new bookings.

3. With the strong response to CKD models such as Kia Carnival, BAUTO plans to put onto the market a second Kia CKD model, i.e. Sorento, scheduled for an official launch in Jan 2023 or Feb 2023, and a third thereafter, either Sportage or Seltos. These will be earnings accretive for BAUTO as CKD models command higher margins than CBU models of up to 5ppts. Over the longer term, BAUTO targets its annual sales of Kia vehicles to hit 10k units within the next 3-4 years, a five-fold increase from its FY23F target of 2k units.

4. BAUTO is committed to a gradual transition towards electric vehicles. It is working hand in hand with other carmakers to gradually strengthen the ecosystem for hybrid and electric vehicles locally to make their prices more affordable. For a start, it is bringing various CBU EV models to the local market including Mazda MX-30 EV, Peugeot e-2008 EV, Kia EV6, and Kia PBV1 and beefing up after-sales support in term of maintenance services and spare parts support system.

A preview of 2QFY23 results. Meanwhile, we expect BAUTO’s 2QFY23 results, due out by the later part of this week, to come in at RM55mRM65m at the core net profit level (up 10% to 30% sequentially), taking our cue from Mazda’s sales in 2QFY23 of 3,394 units (+16% QoQ) that brought 1HFY23 sales to 6,331 units (+49% YoY) as reported by Malaysian Automotive Association and assuming its net profit margin could sustain at between 7% to 8%. We believe a 50% sales & service tax rebate given to buyers of all Mazda models (out of BAUTO’s own pocket) between July 2022 and December 2022 will be cushioned by the above-average margins BAUTO earns from its recently launched new models.

Forecasts. We increase our FY23F and FY24F core net profit by 19% and 14%, respectively, and increased our TP by 15% to RM2.65 (from RM2.30) based on ascribed CY23F PER of 15x, which is at a premium to the auto sector’s average forward PER of 11x given its niche in the premium mid-market segment and ability to consistently pay out good dividends.

We like BAUTO for: (i) its premium mid-market Mazda brand that offers the best of both worlds, i.e. products appeal to the middle-income group and yet command more superior margins than its peers in the mid-market segment, and (ii) its attractive dividend yield of about 6%. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 4). Maintain OUTPERFORM.

Risks to our call include: (i) consumers cutting back on discretionary spending (particularly big-ticket items like new cars) amidst high inflation, (ii) supply chain disruptions, (iii) escalating input costs, and (iv) weakening of MYR against JPY.

Source: Kenanga Research - 5 Dec 2022