BAUTO’s 1HFY24 results beat expectations, we believe, as part of its FY25 sales and earnings could have been brought forward to FY24. We are concerned over subsidy rationalisation hurting its target customers, i.e. the middle-income group. We raise our FY24F core net profit forecast by 10% but cut our FY25F number by 7%. We cut our TP by 29% to RM2.30 (from RM3.22). Downgrade to MARKET PERFORM from OUTPERFORM.

Its 1HFY24 results beat expectations, coming in at 69% and 62% of our full-year forecast and the full-year consensus estimate, respectively. We believe part of its FY25 sales and earnings could have been brought forward to FY24. It declared a second interim NDPS of 5.0 sen in 2QFY24 vs. 3.5 sen paid in 2QFY23, within expectations.

YoY, its 1HFY24 revenue rose 40% driven by robust demand for Mazda vehicles (+13% to 11,257 units), and Kia vehicles (+147% to 1,002 units) vehicles, partially offset by lower sales of Peugeot vehicles (-48% to 573 units) which were mostly premium models. In terms of geographical breakdown, higher sales of 11,492 units (+39%) and 1,340 units (+66%) were recorded in both Malaysia and the Philippines, respectively, on economy reopening.

Its core net profit rose sharper by 64% due to: (i) a higher blended margin with product mix skewed towards high-margin models, (ii) cheaper costs of imported units with the strengthening of the MYR against JPY, and (iii) a lower effective tax rate. Its associates represented largely by contract vehicle assembler Mazda Malaysia Sdn Bhd recorded higher profit contribution of 57%, driven by higher production as the economy reopened.

QoQ, its 2QFY24 revenue plunged 8% dragged by weaker performance across all brands, Mazda (-4%), Peugeot (-17%) and Kia (-35%) vehicles. Its core net profit fell slightly more at 10% due to: (i) lower margins from heavy discounting promotion, and (ii) weaker profit contribution of 18% by its associates represented largely by contract vehicle assembler Mazda Malaysia Sdn Bhd due to lower production volume on weaker vehicles demand.

Forecasts. We raise our FY24F core net profit forecast by 10% but cut our FY25F number by 7% as we bring forward part of FY25F earnings to FY24F. This follows a 7% upgrade in our FY24F sales volume assumption to 23.8k but a 3% reduction in our FY25F number to 22k units. As such, we now project its sales volume to jump 21% in FY24 but contract by 6% in FY25. We also factor in a weaker MYR vs. JPY.

Valuations. Correspondingly, we cut our TP by 29% to RM2.30 (from RM3.22) as we now value BAUTO at 10x CY24F PER, at a 1x multiple discount to the sector’s average forward PER of 11x to reflect higher earnings risk for mid-market auto players on subsidy rationalisation which will hurt their target customers, i.e. the middle-income group, the most. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 4).

We continue like BAUTO for: (i) its strong near-term earnings visibility backed by an order backlog of 3.5k units for Mazda, Kia and Peugeot vehicles, (ii) its premium mid-market Mazda brand that offers superior margins, and (iii) its attractive dividend yield of about 8%. However, we are concerned over subsidy rationalisation hurting its target customers, i.e. the middle-income group. Downgrade to MARKET PERFORM from 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) MYR weakens against JPY.

Source: Kenanga Research - 13 Dec 2023