Investment Highlights

• We maintain our BUY recommendation for DRB-Hicom with an unchanged SOP-based FV of RM2.49/share. The bulk of our valuation method is based on book values of different segments of the group.

• We cut DRB-Hicom’s FY20F core net profit forecasts by 57% to account for: i) lower sales volume from Proton, the defence and aviation segments; ii) lower revenue and earnings contribution from the group’s services segment; and iii) lower revenue and earnings contribution from the group’s PAC division amidst the Covid-19 outbreak. We leave our FY21–22F estimates unchanged.

• DRB-Hicom’s 1QFY20 core net loss of RM51.1mil came in below our and consensus full-year forecasts.

• DRB’s automotive division recorded a drop in 1QFY20 revenue at RM1.8bil (-13% YoY) and an LBT of RM90.4mil. We believe that the significant deterioration from 1Q19’s PBT of RM258.7mil was due to: i) less favourable sales mix despite higher Proton’s overall sales volume (lesser X70 sold); and ii) poorer sales deliveries from CTRM and Deftech due to a service disruption amidst the Covid-19 outbreak.

• Proton sold a total of 21.8K units of vehicles (+19% YoY) in 1QFY20. The Proton X70 contributed 4.1K of the total sales (see Exhibit 4).

• DRB’s services division posted a lower revenue in 1QFY20 of RM830.5mil (-32% YoY) and the division reported an LBT of RM51.8mil (-293% YoY). The notable drag for the division was a weaker performance from Bank Muamalat and the deconsolidation of Alam Flora.

• DRB’s logistics business recorded a 1QFY20 revenue of RM527.4mil (-6% YoY). The company guided that despite a surge in courier volume, the Covid-19 outbreak and MCO had adversely impacted other divisions under Pos Malaysia such the logistics and aviation segment.

• DRB’s PAC division reported a 1QFY20 revenue of RM93.3mil (-47% YoY) and a lower PBT of RM8.3mil (-94% YoY). This was mainly driven by lower revenue recognized from construction-related projects mainly from Media City Development and Northern Gateway Infrastructure; and the completion of the Bukit Kayu Hitam ICQS.

• We foresee that losses will widen in 2QFY20. However, we believe that the negatives have already been priced in. We expect a strong showing for 2H2020 as Proton will be a key beneficiary of the expansionary SST exemption stimulus implemented by the government due to their entire fleet of vehicles being CKDs, making their products even more attractively priced. Proton’s PIES models also provide excellent value propositions. We are looking forward to the launch of the Proton X50 in 2H2020.

Source: AmInvest Research - 26 Jun 2020