BAUTO's 1HFY25 saw its core net profit plunging 42% YoY as the sales volumes of Mazda and Kia vehicles plummeted on intense competition, the phasing out of Peugeot dealerships, and unfavourable sales mix. While results disappointed, for which we reduced our FY25−26F net profit by a respective 19−8% on lower sales volumes, well-anticipated new launches arriving ahead in 2025 (see Exhibits 1, 2 and 3 overleaf) are seen competitive with Chinese makes, and will uplift earnings. Our PE-based TP is accordingly lowered by 10% to RM2.20, but we maintain our OUTPERFORM call.

BAUTO offers attractive a dividend yield of 9%.

Its 1HFY25 core net profit came below expectations at 40% and 33% of our forecast and the consensus estimate, respectively. The key variance against our forecast came from the lower-than-expected sales volume as competition intensified. It declared a second interim NDPS of 3.0 sen and a special NDPS of 7.0 sen earlier in the month, with a total NDPS of 13.5 sen for 1HFY25 vs. 10.0 sen for 1HFY24, as expected.

YoY, its 1HFY25 revenue plunged 29% dragged by weak demand for Mazda vehicles (-30% to 7,882 units), Kia vehicles (-55% to 452 units) and the phasing out of Peugeot vehicles dealership (-23% to 442 units), which faced intense competition from the influx of Chinese-made vehicles with low entry-level price points, partially offset by maiden sales of Xpeng vehicles (156 units). In terms of geographical breakdown, lower sales of 7,909 units (-31%) and 1,023 units (-24%) were recorded in both Malaysia and the Philippines, respectively, as competition heightened.

Its core net profit plunged by a steeper 42% due to: (i) lower margins from its Kia operations, (ii) unfavourable sales mix, and (iii) lower contribution from its associates, represented largely by contract vehicle assembler Mazda Malaysia Sdn Bhd and Inokom Corporation Sdn Bhd, which recorded weaker profits on lower production level.

QoQ, its 2QFY25 revenue fell 24% on weaker demand for Mazda vehicles (-21%), Kia vehicles (-35%) and the phasing out of Peugeot vehicles dealerships (only sold 13 units for the quarter), partially offset by maiden sales of Xpeng vehicles (156 units). Its core net profit sank by a steeper 43% due to same reasons as mentioned above.

Forecasts. We lowered our FY25F and FY26F net profit by 19% and 8%, respectively, to account for the lower-than-expected sales volume.

Valuations. Correspondingly, we reduced our TP by 10% to RM2.20 (from RM2.45) based on unchanged 10x CY25F PER, at a 1x multiple discounts to the sector's average forward PER of 11x to reflect higher earnings risk for mid-market auto players on subsidy rationalisation which will hurt their target customers, i.e. the middle-income group, the most. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 4).

Investment case. We continue to like BAUTO for: (i) its strong near- term earnings visibility backed by an order backlog of 1.2K units for Mazda, Xpeng and Kia vehicles, (ii) its premium mid-market Mazda brand that offers superior margins, and (iii) its attractive dividend yield of about 9%. The share price has declined 11% YTD, which we believe has been factored in with BAUTO now trading at 9x based on our FY26F EPS, which is cheap versus historical average of 11x and auto sector's average forward PER of 11x. Maintain OUTPERFORM.

Risks to our call include: (i) consumers cutting back on discretionary spending (particularly big-ticket items like new cars) amidst high inflation, (ii) supply chain disruptions, (iii) escalating input costs, and (iv) MYR weakens against JPY.

Source: Kenanga Research - 13 Dec 2024