Investment Highlights

• We downgrade DRB-Hicom to HOLD with a revised SOP derived fair value of RM1.65 (from RM2.38) (Exhibit 3). Our FV implies 20x PER of 2022F earnings. The shortage of X70 and X50 parts may limit Proton’s earnings potential, posing a reputational risk to the brand. Widening losses of Pos Malaysia also pose downside risk to earnings.

• DRB-Hicom returns to profitability with core net profit of RM199.2mil in 4Q21, from a net loss of RM171.7mil in the previous quarter. This narrowed its 2021 core net loss to RM210.2mil, an improvement from last year’s core net loss of RM284.5mil. The stronger earnings were mainly driven by the recovery of the automotive division as the economy reopens. The results were below our estimate but within consensus.

• The automotive segment’s revenue expanded 182% as DRB-Hicom-related brands’ sales soared, driven by the pent up demand. Proton and Honda sales volume grew 172% and 265% QoQ, respectively. Automotive PBT improved to RM326.9mil, from an LBT of RM171.8mil in 3Q21.

• The aerospace & defence division’s PBT rose 212% QoQ from 3Q21’s low base. DEFTECH delivered a total of 233 units of AV-8 armoured vehicles in 2021, with 26 units be delivered in 2022.

• However, Pos Malaysia’s (HOLD, fair value RM0.76) losses continue to drag earnings. DRB-Hicom’s postal division PBT losses widened to RM179.4mil (3Q21: LBT of RM42.2mil). Pos Malaysia reported lower revenue as its mail, courier and International segments underperformed. The company will be focusing on improving its cost efficiency and customer centric strategic as part of its turnaround plan.

• Bank Muamalat’s PBT was flat QoQ and YoY. The decrease in capital gains and investment income was offset by higher financing income and lower modification loss.

• We cut 2022F and 2023F earnings by 20% and 6% respectively, taking into account the chip shortage issue.

• Proton’s rebuilding consumer confidence efforts in jeopardy. The shortage of the Proton X70 and X50 parts that is affecting customers’ after-sales service experience may deter Proton’s years-long brand rehabilitation efforts and limit Proton from reaching its full potential. Other key downside risks are the widening of Pos Malaysia’s losses and a worse-than expected chip shortage which could disrupt Honda and Proton’s production. The upside risk is new defence-related contract wins.

Source: AmInvest Research - 25 Feb 2022