BAUTO’s 1QFY25 net profit met expectations, despite plunging 30% YoY as the sales volumes of Mazda and Kia vehicles fell on intense competition from Chinese-made vehicles, and on rising costs of its imported units on MYR’s weakening against the JPY. It has attractive new launches planned for FY25 to remain competitive. We maintain our forecasts, TP of RM2.45 and MARKET PERFORM call.

Its 1QFY25 core net profit came in within our forecast and the consensus estimate at 25% and 23%, respectively. It declared a first interim NDPS of 3.50 sen, as expected.

YoY, its 1QFY25 revenue plunged 22% dragged by weak demand for Mazda vehicles (-23% to 4,414 units) and Kia vehicles (-55% to 274 units), which faced intense competition from the influx of Chinese-made vehicles with low entry-level price points, partially offset by higher sales of Peugeot vehicles (+37% to 429 units). In terms of geographical breakdown, lower sales of 4,555 units (-23%) and 562 units (-23%) were recorded in both Malaysia and the Philippines, respectively, as competition intensified.

Its core net profit plunged by a steeper 30% due to: (i) lower margins from its Kia operations, and (ii) rising costs of imported units as the MYR weakened against the JPY. However, these was partially offset by higher contribution from its associates, represented largely by contract vehicle assembler Mazda Malaysia Sdn Bhd and Inokom Corporation Sdn. Bhd. which recorded stronger profits on higher production level.

QoQ, its 1QFY25 revenue fell 10% on weaker demand for Mazda vehicles (-9%) and Kia vehicles (-32%), partially offset by higher sales of Peugeot vehicles (+88%). Its core net profit fell by a steeper 22% due to reasons mentioned above, and worsened by lower contribution from its associates, contract vehicle assembler Mazda Malaysia Sdn Bhd, which recorded lower profits on reduced production level.

Forecasts. Maintained.

Valuations. We also maintain our TP at RM2.45 based on 10x CY25F PER, at a 1x multiple discounts 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, and Kia 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 as well as intense competition from Chinese-made vehicles. 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 - 13 Sep 2024