INVESTMENT THESIS

• 3QFY17 was slightly ahead of ours, but below consensus

• 4QFY17 will see margin uplift from price hikes

• WE conservatively keep forecasts despite outperformance in anticipation of volume impact from price hikes

• Re-affirm BUY at unchanged TP of RM2.50 (from RM2.45). 8.6% dividend yield is nothing less than solid

Ahead of ours, below consensus BAuto reported 3QFY17 net profit of RM25m, which brought 9MFY17 earnings to RM97m. While this is slightly ahead of our FY17F – accounting for 81% of our full year forecast, we conservatively keep our numbers for now. BAuto’s 9MFY17 however, accounted for just 60% of consensus.

Seasonally weakest. The 3QFY17 is BAuto’s seasonally weakest quarter in terms of volumes, hence the 18%qoq drop in earnings on the back of a 37%qoq volume fall. BAuto, being a niche player, does not participate in year-end sales campaigns; hence volumes are usually negatively affected in this period. BAP was also hit by supply constraints throughout most of FY17. this time around, BAuto is hit by the peak JPY during the quarter (circa JPY:RM4.1), leading to the sharp drop in earnings on a year-on-year basis. A year ago, BAuto’s JPY exposures were hedged at RM3.5-3.7 levels. IT is no longer hedged now but BAuto is only exposed to the JPY for CBU purchases, which accounted for 40% of 9MFY17 sales (a reduction versus 50% CBU contribution in 9MFY16).

Price hike. The 4QFY17 will reflect the initial impact of the 2%-3% price hikes undertaken by BAuto in Jan17. This should be positive for margins, but we are cautious on the impact on volumes, hence our conservative volume forecasts and the reason we are keeping our numbers for now, despite the slight outperformance. Nonetheless, we stick to our conviction that the worst is over for BAuto. Key earnings catalysts in the next 12 months are: (1) A pick up in sales of the Mazda 2 CBU given renegotiated, lower pricing of this unit from Mazda Corporation for a limited batch of 1,000 units – it will enjoy additional margins of RM1,600/car (2) Introduction of the facelift Mazda 2 and Mazda 3 in Apr-May 2017 (3) Easing JPY currency to

Recommendation. From a valuation standpoint, BAuto is cheap at just 10.7x CY18F earnings, relative to historical sector PE of ~12x. Given a strong 41% earnings CAGR over the next 2 years, solid dividend yields and value unlocking from the listing of BAP, should in fact trade at a premium to the sector. Re-affirm our BUY call at a unchanged SOP-derived TP of RM2.50/share.

Source: MIDF Research - 15 Mar 2017