This article first appeared in The Edge Financial Daily on December 5, 2018

Cycle & Carriage Bintang Bhd
(Dec 4, RM1.75)
Downgrade to sell with a lower target price (TP) of RM1.48: Cycle & Carriage Bintang Bhd (C&C Bintang) will cease to be a shareholder of Mercedes-Benz Malaysia Sdn Bhd, which is the entity that manages the wholesale distribution of Mercedes-Benz vehicles in Malaysia. This comes after Daimler AG exercised its call option on 66 million Mercedes-Benz Malaysia shares held by C&C Bintang. Consequently, C&C Bintang is obliged to sell its 49% stake in Mercedes-Benz Malaysia to Daimler. There is no expected gain or loss from the disposal as the consideration is on par with the cost of investment in 2003. The disposal proceeds will be used for both working capital as well as repayment of borrowings.

We are negative about this disposal, as it will strip off C&C Bintang’s recurring dividend income. Following the disposal, C&C Bintang will no longer be entitled to the annual dividend income of RM11.2 million. After the disposal, C&C Bintang will remain as the leading dealer for Mercedes-Benz vehicles with the largest network in Peninsular Malaysia.

There is a positive uptick in margins but challenges remain as we think C&C Bintang’s profitability will continue to face headwinds from various aspects, which include the intense competition internally as well as from other Mercedes-Benz dealers, and also the higher capital expenditure (from the building of Sungei Besi showroom) or operational expenditure commitment (mainly from staff costs, professional fees, marketing, and promotional expenses). That said, we believe the recent shift towards higher-margin mix from lower-margin cars may spark hope for an uptick in margins.

Following the disposal, we cut our core earnings per share down by 38%-57% for financial year 2019 (FY19)-FY20 estimates in order to reflect the absence of the annual dividend income. In tandem with the earnings downgrade, we lower TP to RM1.48 from RM2.00 previously. This is based on 0.5 times calendar year 2019 book value estimate due to the challenging outlook. We downgrade our call to “sell”. — Affin Hwang Capital, Dec 4