Investment Highlights

• We maintain our BUY call for DRB-Hicom with an unchanged SOP-based fair value of RM2.49/share (Exhibit 1). We make no changes to our FY20–22F earnings forecasts.
• Key highlights from DRB’s analyst briefing:

1. Bookings for the Proton X50 B-segment SUV have breached the 30.0K mark, with a monthly production volume of about 3.5K–4.0K per month.
2. According to Paul Tan’s Automotive News, the Proton X50 has a local content of 40%. We understand that Proton plans increase its localization rate for the X50 over the next few years. This will improve Proton’s profit margins as it will likely be entitled to higher excise duties rebates.
3. We gather that there will be two (2) more Geely-inspired products in the next 2 years. One of them, we believe, will be an MPV to boost its product line-up (which already consisted of 2 SUVs). We also understand that Proton will continue to do minor upgrades (facelift launches) for its existing PIES models. We take comfort in the fact that Proton is taking efforts to regain consumer confidence, as well as increase its sales volume and market share in the domestic auto market. There are also plans to increase the Tanjung Malim plant’s capacity to 400.0K over the next 2–3 years (from 250.0K currently).
4. Composite Technology Research Malaysia (CTRM), a division of DRB’s automotive arm, has managed to remain profitable despite a significant drop in revenue of 30–40%. We gather that the lower revenue was due to Boeing and Airbus pushing back their orders as the Covid-19 pandemic has severely impacted the aviation and travel sectors globally. We expect CTRM to continue facing some headwinds in FY21F.
5. Deftech will deliver the remaining 10% (total contract agreement was 259 vehicles) of the AV8 armoured vehicle to Ministry of Defence (Mindef) by 3QFY21, after being delayed from end-2020 previously (due to the Covid-19 pandemic). We understand that DRB will not have to bear any additional costs despite the extension of the contract.
6. We note that there is a possibility of additional modification loss for Bank Muamalat in 4QFY20 due to the extension of the loan moratorium for the B40 and micro enterprises. We believe that this will not be as severe compared to the modification loss from the blanket moratorium of RM46mil in 2QFY20.

• As the worst is now behind DRB, we think that all the negatives have already been priced in. We strongly believe that Proton’s PIES models, both the Proton X70 and X50 CKDs, along with the future two Geely-inspired models are expected to lift Proton’s sales volume, market share and earnings profile in the future. Proton’s products are competitively priced with advanced features for better consumer experience, offering good value for money. Maintain BUY.

Source: AmInvest Research - 3 Dec 2020