KEY INVESTMENT HIGHLIGHTS

• 1QFY20 earnings in-line with expectations

• Higher interim dividends; generous ~80% payout in-line with forecast

• Earnings held up well despite CX5 run-out

• Expect strong improvement in 2HFY20 driven by new CX8, facelift CX5 and CX30 launch

• Re-affirm BUY; TP unchanged at RM2.85, attractive 7.4% yields

1QFY20 within expectations. BAuto reported 1QFY20 core earnings of RM52m (normalized for RM1.2m ESOS expense recognised in 1QFY20). This is broadly within expectations accounting for 20% of our and 21% of consensus’ FY20F. We expect earnings to strengthen further into the 2HFY20 as contribution from the facelifted CX5 and the all new CX8 kicks in from Sep19 onwards.

Generous dividends. A higher interim dividend of 3.25sen/share (+40%yoy) was declared, representing a generous 81% payout. This is more or less in-line with our forecast of an 80% payout for FY20F, which implies an attractive 7.4% yield. BAuto still entails a net cash of RM189m accounting for 7% of market cap.

Temporary margin pressure. The 1QFY20 reflected the run-out of the current CX5 model, resulting in temporarily lower margins given discounting and higher dealer incentives offered to clear off remaining inventories. Despite lower margins (1QFY20 EBIT margin: 11% vs. 13% in 1QFY19), earnings held up well given higher volumes (+9%yoy) and revenues (+10%yoy).

Associate earnings held up well. Associate earnings, comprising of 30%-owned MMSB and Inokom also held up pretty well, maintaining the same earnings level as 4QFY19. Associate contribution should improve further in 2HFY20 as the group commences production of the CX8 as its 2nd ASEAN (ex-Vietnam) export model after the CX5, as well as for the domestic market.

New launches coming up soon. BAuto expects to maintain FY19 TIV at ~15K units in FY20F. Despite the inflated base driven by the taxholiday in Jun18-Aug18, volumes will be driven by a pipeline of new launches namely the all new CX8 and facelifted CX5 in Sep19/Oct19 and the CX30 sometime in 2QFY20. Incremental volumes will mainly come from the CX8 (estimated monthly volume of 250-300) and the CX30 CBU (estimated 200/month volume). The CX8 is positioned in a less crowded segment of the SUV market competing against Toyota’s Fortuner, mainly. Additionally, BAuto is looking to introduce a new 2.5 litre turbo variant of the CX5 along with the facelifted CX5 model.

Forecasts unchanged. We leave our FY20F earnings unchanged (despite the significant consensus upgrades last quarter when BAuto strongly outperformed). We expect Mazda TIV to sustain at around 15K in FY20F while earnings is expected to reduce slightly off the record FY19 earnings base given absence of the tax holiday period which allowed for much less dealer incentives and A&P expense to drive volumes. Our FY21F earnings of RM267m (+3.1%yoy) reflects full year contribution of the CX8 (vs half year for FY20F), the facelifted CX5 and the CBU CX30. We have yet to factor in any other new model beyond these, into our estimates.

Reaffirm BUY on BAuto at unchanged SOP-derived TP of RM2.85. From a valuation standpoint, BAuto is cheap at just 10.7x CY19F earnings while dividend yield of 7.4% is very attractive. Key catalysts: (1) Launch of the CX8, facelift CX5 and CX30 in 2QFY20 (2) Dividend outperformance (3) Over 50% increase in FY20F export volumes driven by the CX8 (4) Potential NAP incentives to drive CBU exports (5) Potential introduction of an all-new Mazda model in FY21F.

Source: MIDF Research - 17 Sept 2019