Investment Highlights

• We upgrade DRB-Hicom to HOLD from UNDERWEIGHT with a higher FV of RM1.78/share (from RM1.74/share) despite our recent downgrade on Pos Malaysia’s FV from RM1.65/share to RM1.16/share. We reduce our SOP discount rate to 25% from 30% to account for increased stability and better outlook from Proton as we witnessed a decrease in the automotive segment’s earnings volatility in FY19 after the incorporation of Geely as a key partner. We expect this to continue going forward backed by new launches with improved demand for vehicles, especially the X70. We raised DRB-Hicom’s FY20–21 core earnings by 358–107% based on stronger Proton sales volume assumptions of 10–5% from 5–2% and better cost management. Note that the group has a slew of new launches this year — the Saga facelift and the all-new X50, which is a smaller version of the X70.

• DRB-Hicom’s FY19 core net profit of RM159.9mil exceeded our expectations, accounting for 301% and 159% of our and consensus forecasts respectively. The group posted superior profitability margins on all levels, leading to a core net margin of 3.9% in 4Q19. Comparatively, FY18 registered a core net loss of RM131.3mil. We note a cumulative revenue improvement in both the automotive and services segments, registering RM7.4bil (+7% YoY) and RM4.6b (+2% YoY) respectively while the PAC segment achieved a revenue of RM540.9mil (-37% YoY).

• DRB-Hicom’s automotive segment chalked up a 5-year high PBT of RM258.7mil in 4Q19, excluding the government grant in 2QFY18. We saw increasing stability from the segment, from narrowing losses in 1Q and 2Q to a profit in the two recent quarters. This was due to a strong demand for Proton vehicles backed by the X70. We believe that Proton sales volume will continue to be strong with the recent launch of Iriz, Exora and Persona and the upcoming launches of the Saga and X50 as its vehicles are affordably priced, catering to the mass market. Proton recorded a total sales volume of 70.2K units (+9% YoY) for FY19 while Honda sold a total of 100.3K units (-6% YoY). The only notable drag in the segment was from the automotive distribution (AD) division, registering a 27% YoY fall in revenue.

• DRB-Hicom’s services segment recorded a lower cumulative PBT of RM206.4mil (-38% YoY) while the PAC registered a higher cumulative PBT of RM259.7mil (+218% YoY). The services segment’s lower earnings were attributed by the poor performance from Pos Malaysia. The group guided that Pos Malaysia will continue to engage regulators to seek a tariff revision for its regulated services.

• The group’s net gearing level worsened to 0.57x from 0.49x in 3Q19. As DRB-Hicom is traded heavily as a proxy for Proton, we believe that our lower SOP discount rate is justified based on its improved outlook and the group’s plans to turn around Proton.

Source: AmInvest Research - 31 May 2019