• According to a local news report recently, DRB-Hicom and Sime Darby are the frontrunners for the supply, repair, maintenance and management of the government’s vehicle fleet for a concession period of 15 years. The request for proposal (RPF) for the contract closed on 28 February 2019.

• The RFP followed the expiry of the concession held by Spanco Sdn Bhd in 2018. It was reported that the government had paid RM221.6mil a year to Spanco to rent a total of 11,000 Proton cars for official use.

• This time, the tender is for both national and non-national vehicles. The government was looking at Proton as well as Honda and Toyota vehicles for use by ministers, deputy ministers and top civil servants as well as its agencies. The vehicles included the Toyota Vellfire 2.5, Toyota Altis 1.8, Honda Accord 2.0 and 2.4, Proton Persona and the X70.

• Apart from DRB-Hicom and Sime Darby, three other companies i.e. Naza Group, Samling Group and the previous concessionaire Spanco Sdn Bhd also submitted their proposals. This is the third RFP for the concession to manage the government’s vehicle fleet in the past 25 years — two from the previous administration of Barisan Nasional and now under the Pakatan Harapan government.

• We are slightly positive on this news as this gives DRB-Hicom or Sime Darby the opportunity to further stabilize their automotive segments. For DRB-Hicom, it can make this concession award as part of its plan to turn around Proton as quickly as possible. Sime Darby could also benefit from this as we foresee the group’s motor segment to remain slow and sluggish in the near term due to heightened competition in China. We are leaving our forecasts unchanged pending more clarity on the details of the concession award.

• Based on our back of the envelope calculation, an estimated RM80.0 million award will boost either DRB-Hicom or Sime Darby’s earnings by RM1.6 million on an estimated 2% net profit margin respectively. This represents 4% and 0.2% of our projected FY20F earnings for both DRB-Hicom and Sime Darby respectively.

• We retain a TIV projection of 0.8% for 2019 to 603K units. The sector is lagging with no major organic catalysts after receiving a boon from the tax holiday in 2018. Growth in 2019 TIV will very much depend on the performance of volume-oriented players, namely Perodua, Honda, Toyota and Nissan. We have BUYs on Bermaz Auto (BAuto), Pecca Group, MBM Resources and Tan Chong Motor. We have HOLDs on Sime Darby, UMW Holdings and DRB-Hicom, and UNDERWEIGHT on APM Automotive.

Source: AmInvest Research - 15 Apr 2019