Investment Highlights

• We maintain our BUY recommendation for DRB-Hicom with an unchanged SOP-based fair value of RM2.55/share.

• DRB-Hicom’s FY20 core net loss of RM96.1mil (adjusted for gains on disposal of property assets of RM862.6mil recognized in 4QFY20 and the disposal of World Cargo Airline of RM83.4mil) was broadly in line with our expectation, but worse than consensus full-year estimates of -RM81.8mil and - RM144.6mil respectively.

• DRB’s automotive division recorded an FY20 revenue of RM8.0bil (-12% YoY) with an LBT of RM2.5mil. We believe that the decline from FY19’s PBT of RM600.7mil was due to: i) delayed deliveries of AV8 tanks and CTRM composite materials due to the MCO and global down cycle of the aviation industry throughout FY20 (with orders from Airbus and Boeing being pushed back); and ii) the earnings vacuum in 2QFY20 when all showrooms and manufacturing activities came to a complete halt during the MCO.

• Proton sold 108.5K vehicles (+8% YoY) in FY20 despite the MCO from 18 March till 4 May 2020, driven by overwhelming sales of the PIES models given its value propositions with affordable price points. The Proton X70 and X50 contributed 21.9K and 3.8K of 2020 total sales respectively (Exhibit 4).

• DRB’s services division posted a lower revenue in FY20 of RM3.5bil (-21% YoY) and the division reported an LBT of RM35.3mil (-86% YoY). The unfavourable results were due to: i) lower performance from Bank Muamalat as a result of modification losses arising from the loan moratorium; and ii) drag from 53.5%-owned Pos Malaysia due to the temporary shutdown of its main parcel processing centre (70% of total capacity) Oct–Nov 2020 on the back of the Covid-19 outbreak.

• DRB’s PAC division reported a FY20 revenue of RM1.6bil (+249% YoY) and a higher PBT of RM869.0mil (+369% YoY) on an exceptional gain from a one-off disposal of property assets of RM862.6mil. We gathered that construction-related activities for Media City Development and ICQS have been fully completed. Hence, we are forecasting this division to recognize minimal revenue and will break even at best going forward into FY21–22F.

• Despite the poor set of results largely due to the MCO and the Covid-19, we think that the worst is now behind DRB-Hicom. We strongly believe that the PIES models – the X70 and X50 CKDs – are expected to lift Proton’s sales volume and earnings as its SUVs are competitively priced with advanced features for better consumer experience and value for money. We also look forward to the debut of two more Geely-inspired models over the next 2 years (one MPV and one sedan), which will ensure growth sustainability for the Proton and enhance its product line-up over the next few years. Maintain BUY.

Source: AmInvest Research - 25 Feb 2021