• Stay BUY, new MYR3.25 TP from MYR3.45, 46% upside. FY23 (Apr) earnings and DPS beat our and Street’s expectations. Looking ahead, the cheaper CX-30 CKD should help support Mazda sales when other brands are lifting car prices. Kia and Peugeot should continue to see marginal volume growth from a low base, driven by new model launches. Despite great FY23 earnings, we trim our TP based on a lower valuation multiple to reflect a more cautious sentiment towards the sector. We favour Bermaz Auto for its relative resilience and 9% FY24F yield.

• Another exceptional quarter. 4QFY23's core profit of MYR101m brought FY23 core earnings to MYR304m, exceeding our and Street's projections by 12% and 14%. BAUTO’s earnings beat mainly due to stronger-than- expected margins. Its 4QFY23 and special DPS of 3.5 sen and 7.5 sen brought FY23 DPS to 22 sen – above our forecast of 17 sen.

• BAUTO closed FY23 on a strong note, with Malaysia and Philippines sales volumes rising 10% and 44% QoQ, which drove revenue growth of 8% and 49%. The 10% growth in Malaysia’s auto volumes was partially driven by the 761% increase in CX-30 CKD sales volumes. Meanwhile, both Kia and Peugeot continued to grow QoQ, rising by 19% and 14%. This was partially supported by the newly launched Kia Sorento and Peugeot Landtrek CKDs. BAUTO’s margins improved across the board due to product mix and seasonality, as 4Q tends to see higher margins.

• Outlook. Despite expectations of softer TIV in 2024, we think BAUTO’s car sales will remain resilient. This is mainly supported by Kia and Peugeot, which should both continue to see marginal volume growth from a low base, driven by new model launches. While we expect softer Mazda sales, we think the cheaper CX-30 CKD (previously CBU) should help support Mazda’s sales volumes, especially as other brands lift car prices.

• Forecast. We lift our FY24F earnings by 7% as we lift margins assumptions to reflect BAUTO's more favourable product mix. We also lift our FY24F DPS assumption to 20 sen from 19 sen, assuming a payout ratio of 73%, ie conservative relative to FY23's 84% and pre-pandemic's 80-100%.

• Despite earnings beat, we lower TP to reflect a more cautious sentiment towards the sector. We cut our TP to MYR3.25 as we now ascribe 11.5x P/E to FY24F EPS (previously 13x FY24F EPS). The 11.5x is at +0.5SD of its 5-year mean of c.11x. The slight valuation premium is to reflect BAUTO's relative resilience and attractive yields. Our TP includes a 4% ESG premium, based on an unchanged ESG score of 3.2.

• Maintain BUY, currently the only BUY in the sector. Though we turn less bullish on the auto sector, we continue to prefer BAUTO as our Top Pick, as we think its aforesaid brand-specific factors make it relatively less susceptible to a potential industry-wide slowdown. We also like its attractive 9% FY24F yield. Key downside risks include softer-than-expected orders and deliveries, and resurgent component shortages. 

Source: RHB Research - 13 Jun 2023