INVESTMENT THESIS

• 3Q18 results in-line

• Earnings gapped up 82%qoq and 61%yoy

• MMSB volumes/earnings hit record high

• Re-affirm BUY at unchanged TP of RM2.70, 8% yields attractive

Results in-line. BAuto reported net profit of RM41m for its 3Q18 which brought 9M18 earnings to RM83m. This is within estimates (at 64%of our FY18F and 58% of consensus) as earnings are backloaded into the 2H of FY18F. A dividend of 2.3sen/share representing payout of 66% was declared, bringing 9M18 dividends to 5.4sen/share.

Earnings gapped up. BAuto made a strong comeback registering a strong 82%qoq and 61%yoy growth. Volumes for both Malaysia (+14%yoy) and Philippines (+19%yoy) increased from launch of the new CX5 in both markets. For Malaysia, sales of the new CX5 almost doubled against 2Q18 – as the model was launched towards end 2Q18.

Margin expansion. Operating margins for domestic operations is showing solid recovery rising to 9.7% in 3Q18 from 7.3% in 2Q18 (See Exhibit 1). Management guided that operating margins can recover to >10% levels over the next few quarters, driven by the stronger Ringgit and higher margin sales of the new CX5. Half of the new CX5 bookings went towards special colour variants priced at RM2000 premium. Margins could have been even better if not for some sale of the old CX5 in 3Q18 of 229 units (vs. 457 units in 2Q18), but this should be the final batch.

Associates returns to profits and hits a record! After hardly seeing any earnings in 1H18 (as earnings from Inokom were offset by losses at MMSB), associates returned to profits and in fact hits a record high of RM6.5m in 3Q18 (See Exhibit 2). MMSB manufacturing volumes expanded 94%yoy and 158%qoq, also hitting record high volumes of 4618 units in 3Q18 driven by strong production for domestic sales and export expansion into South East Asia (ex-Vietnam) vs. just Thailand previously. Similarly, volumes at Inokom (which also reflects BMW/Hyundai production) were up 79%yoy and 74%qoq.

Expect further improvements ahead. (1) Meaningfully stronger RM from 1QFY19 at RM3.5-3.6 levels - currently rates have been locked in at RM3.85 up till end 4QFY18, (2) Price hike of RM1000/car from Jan18 (only 1 month impact captured in 3Q18) - we estimate this will impact annual earnings by ~2% based on our conservative FY19F CX5 volume of 6K units (3) Further volume expansion in 4Q18 as 3Q18 captures the seasonally weak year-end period. We expect Mazda TIV to expand by a further 20%qoq and >50%yoy in 4Q18, (4) Sustained earnings improvements at MMSB and Inokom which benefits from the higher throughout both domestically and in the export markets in Thailand, Indonesia, Philippines and Cambodia. BAuto is targeting FY18F Mazda TIV of 11.5K for FY18F and rising by 17%-30% to 14.5K-15K in FY19F, mainly driven by full year contribution of the new CX5 and in part, contribution by the CBU CX8 from 2HCY18.

Source: MIDF Research - 13 Mar 2018