INVESTMENT THESIS

• 2QFY17 earnings came weaker than expected but interim dividends 10% higher

• Dealer inventory clearance and peak JPY impacted the quarter negatively but partly offset by strong Philippines growth

• Listing of BAuto Philippines (BAP) is a dividend catalyst and crystallises value, while restocking and a price hike in Jan17 will drive a stronger 2HFY17 for domestic business

• Maintain BUY at lower TP of RM2.45. 2QFY17 weakness doesn’t derail our thesis of rising dividends and value unlocking at BAP.

Weak quarter. BAuto reported 2QFY17 net profit of RM30m which brought 1HFY17 earnings to RM72m. This is short of expectations accounting for 36% of both our and consensus estimates. Having said that, 2QFY17 should mark bottom as earnings trends should improve given a weaker JPY and dealer restocking from 3QFY17. An interim dividend of 2.75sen (+10%yoy) was declared, representing 104% payout ratio, underpinning our view of rising dividends. As of 1HFY17 5.75sen/share dividends (+21%yoy) were declared (93% payout ratio).

Marks bottom. The JPY was at its strongest in the quarter at an average JPY100:RM4.00 while invoiced sales were also down 9%qoq as dealers were clearing inventories for year end - this is where most of the deviation came from against our earlier projections. On the bright side, (1) Delaers would start restocking soon and this will be reflected partly in 3QFY17 (2) The JPY has weakened to 3.85-3.90 levels now since hitting a peak of 4.10 in the 2QFY17 (3) BAuto will implement a price hike of between 3%-5% from Jan17 which will help offset part of the JPY strength seen in the past 12 months (4) With the group’s new paintshop, BAuto will also start offering the soul red colour for CKD models from Jan17, which should improve sales. These are currently only available as more expensive CBU variants.

BAP made up some of the slack. BAuto Philippines (BAP) registered strong revenue (+27%qoq) and earnings (+32%qoq) growth on the back of a strong domestic market (which is growing at 20%-30%) and this partly offset the weakness at the domestic side. Additionally, the PHP remained steady relative to the RM compared to the previous quarter

Source: MIDF Research - 9 Dec 2016