BAUTO’s FY24 results beat expectations. Its 4QFY24 net profit rose 28% QoQ on stronger margins as it significantly dialled back discounts and a higher production volume at its manufacturing unit. We raise our FY25F net profit by 6%, lift our TP by 7% to RM2.45 (from RM2.30) but maintain our MARKET PERFORM call.

Its FY24 core net profit beat our forecast and the consensus estimate by 16% and 7%, respectively. The key variance against our forecast came from stronger-than-expected margins as it significantly dialled back discounts. It declared a fourth interim NDPS of 4.75 sen and special NDPS of 7 sen in 4QFY24, bringing full-year NDPS to 26 sen, which beat our expectation as well.

YoY, its FY24 revenue rose 11% driven by robust demand for Mazda vehicles (+21% to 20,977 units), partially offset by lower sales of Kia vehicles (-16% to 1,851 units) and Peugeot vehicles (-50% to 947 units) as the Stellantis group assumed full control over the local Peugeot franchise. In terms of geographical breakdown, higher sales of 21,192 units (+8%) and 2,583 units (+54%) were recorded in both Malaysia and the Philippines, respectively, as economies reopened.

Its core net profit rose by a steeper 16% due to: (i) a higher blended margin with a product mix skewed towards more high-margin models, and (ii) cheaper costs of imported units on the MYR’s strength against the JPY. Its associates, represented largely by contract vehicle assembler Mazda Malaysia Sdn Bhd, recorded higher profits driven by higher production as the economy reopened.

QoQ, its 4QFY24 revenue rose 5% as it dialled back on discounts coupled with strong Kia vehicle sales (+56%), partially offset by lower vehicle sales of Mazda (-1%) and Peugeot (-9%). Its core net profit rose by a steeper 28% on: (i) higher margins as it dialled back on discounts as mentioned, and (ii) stronger contribution from its associates, represented largely by contract vehicle assembler Mazda Malaysia Sdn Bhd, which recorded higher profits on higher production.

Forecasts. We raise our FY25F net profit forecast by 6% to account for stronger margins. We also introduce FY26F net profit forecast (+4% YoY).

Valuations. Correspondingly, we lift our TP by 7% to RM2.45 (from RM2.30) based on 10x CY25F PER (rolled forward from CY24F), 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).

Investment case. We continue to like BAUTO for: (i) its strong near- term earnings visibility backed by an order backlog of 2k 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. Maintain MARKET PERFORM.

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 - 12 Jun 2024