KEY INVESTMENT HIGHLIGHTS

• BAuto’s 1QFY21 disappointed.
• Strong rebound in revenue (+50%qoq), but margins likely dragged by deep discounting in 1st half of 1QFY21.
• Focus in 1QFY21 was on mending balance sheet and cash flow position, which has improved significantly; BAuto now back in net cash position, inventories pared down substantially.
• Earnings and TP under review pending a meeting with management next week, but BUY maintained.

1QFY21 disappointed. BAuto reported a core net profit of RM10m for its 1QFY21, which disappointed both our and consensus estimates accounting for 5.4% and 6.7% of full year estimates respectively. An interim dividend of 0.5sen/share was declared, representing a 63% payout.

Margin contraction. Whilst 1QFY21 revenue staged a strong 50%qoq rebound on the back of a 67%qoq increase in sales volume (which has recovered to >2500 unit quarterly levels), this did not translate into a corresponding improvement in earnings. Margins for the Malaysian operations contracted significantly to 4% in 1QFY21, vs. 9%-13% levels in pre-recession years. Earnings were also dragged by losses at 30%- owned MMSB given minimal domestic and export volumes during the period.

Deep discounting? We suspect the drag to margins in 1QFY21 was driven largely by deep discounting during the first half of the 1QFY21 (i.e. May and the first half of June) as players came out of the lockdowns cash-strapped, with bloated inventories and with an uncertain view of auto demand – which might have driven aggressive clearing of inventories in the period. The announcement of the tax holiday on the other hand, came only circa a week prior to its actual implementation.

Shoring up balance sheet position. We believe BAuto’s priority in 1QFY21 was to shore up its balance sheet position having seen this deteriorate significantly in 4QFY20, when operations were largely impacted by the MCO. Reflecting the improvement in financial position, BAuto recovered to a net cash position of RM71m in 1QFY21 (from a net gearing of 9% in 4QFY20), inventory days normalised to 80 days (from 209 days in 4QFY20) while current ratio improved to 2.4x (from 1.3x in 4QFY20). Free cash flows improved to RM129m in 1QFY21 from a -ve RM114m last quarter. Whilst earnings in 1QFY21 was disappointing, the much stronger balance sheet and cash flows positions the group well to capitalize on the recovery in auto demand driven by the tax holiday implementation.

Source: MIDF Research - 11 Sept 2020