KEY INVESTMENT HIGHLIGHTS

• BAuto delivered weak 2QFY20 earnings

• A 2.75sen/share interim dividend declared, generous 95% payout (1HFY20)

• Temporary impact from CX8 and facelift CX5 pricing approval delay

• Earnings delayed, not cancelled; ready booking bank to meet delayed deliveries next quarter

• Maintain BUY at unchanged TP of RM2.85

A weak 2QFY20. BAuto reported a weak set of results for its 2QFY20. The group registered a core net profit of RM22m for its 2QFY20 bringing 1HFY20 core net profit to RM73m (normalized for ESOS expense of RM2.3m). This is behind expectations accounting for 28% and 29% of our and consensus estimates respectively. However, we expect the weakness to be temporary. An interim dividend of 2.75sen/share was declared bringing 1H20 interim dividend to 6sen/share, representing a generous 95% payout.

Temporary sales slowdown. The weak 2QFY20 earnings (-71%yoy) were due to the delay in deliveries of the all new CX8 (launched in Oct19) and facelift CX5 (launched Sep19) which was a result of the delay in regulators’ pricing approval of these models. This resulted in Mazda TIV falling 27%qoq and 47%yoy. The weak domestic performance was partly offset by improved earnings at BAuto Philippines (BAP) (+79%yoy) driven by an improved model mix following launch of the new Mazda 3 this quarter (BAP sales were previously mainly driven by the Mazda 2).

Associate earnings also affected. Associate earnings (comprising 30%-owned manufacturing units MMSB and Inokom) saw spillover impact from the pricing delay issues – volumes are only recognized once the finished units are invoiced to end-customers. MMSB earnings specifically fell by 31%qoq and 68%yoy in 2QFY20. A recovery in Mazda TIV and group earnings, expected from next quarter onwards, should be accompanied by a turnaround in associate performance as well.

Earnings delayed, not cancelled. We expect the delivery delays to be contained to the current quarter as the pricing issues have been resolved and deliveries should be reflected from 3QFY20 onwards. Bookings for the CX8 stand at ~400 units (vs. a target monthly volume of 250-300 units) while bookings for the CX5 currently stands at around 750 units. BAuto has built-up sufficient inventories to meet the delayed deliveries next quarter. Beyond the CX8 and facelift CX5, the CX30 (CBU) is scheduled to be launched in 3QFY20.

Source: MIDF Research - 11 Dec 2019