We anticipate FY2019 earnings to be within expectations supported by the stronger Malaysian units sales of 8,132 units (+65%) as we expect sales to normalize in 2H19. BAUTO recorded an all-time high for quarterly Malaysian sales in 2Q19 from the supply recovery after a constraint during the first two months of the zero-rated tax holiday. BUY with a TP of RM2.50 based on 13x CY19E EPS, which is undemanding based on its 3-year forward historical mean PER and average net profit growth of 30% for the next 2 years. 

We like BAUTO because for its: (i) solid earnings recovery with the launch of its flagship model, the all-new Mazda CX-5, (ii) superior margins, which is head and shoulders above industry peers (average profit margin of c.8% as compared to peers' average at c.2%), and (iii) steady dividend yield at 7%. 

According to an announcement to Bursa Malaysia, BAUTO has decided not to proceed with the proposed listing of the 60.4%-owned, BAUTO Philippines due to the implementation of the Tax Reform for Acceleration and Inclusion (TRAIN) law in January 2018. The TRAIN law has caused an increase in excise tax (up to 7%) and consequently, increased in car prices, thus affecting the demand for motor vehicles in the Philippines. 

BAUTO plans to maintain its sales volume by increasing its Philippines dealerships to 21 from the current 18 by end FY19 with target to maintain its FY18 unit sales level of c.5,000 units/year. BAUTO will maintain its zero-rated pricing for vehicles booked before 1st September 2018 (new SST implementation) and expect better sales in FY19 mainly from the all-new Mazda CX-5 CKD units (backlogged booking of 4k units). For CY18, BAUTO recently launched the face-lifted Mazda CX-3 and facelifted Mazda 6 (CBU), while for CY19, BAUTO is expected to introduce the new generation of its flagship models of Mazda 3 and all-new Mazda CX-8 CKD in 2HCY19.

Source: Rakuten Research - 6 Dec 2018