Post site visits, we are positive with DRB’s 34% owned Honda Malaysia (Honda) and 96.87% owned CTRM. Both entities are profitable with expected continuing earnings growth in coming years. Honda’s earnings growth is supported by higher car sales volume, better sales mix and RM appreciation. CRTM’s earnings growth is driven by increasing demand for Airbus A320s and new Airbus A350s. Our forecast is unchanged and we maintain our BUY rating with SOP based TP: RM2.88.

Honda Malaysia (34% owned by DRB). Honda is targeting relatively flat sales volume of 109k units in 2018 (vs. achieved sales 109.5k units in 2017), as the OEM only has 2 line up launches of Odyssey facelift and HRV facelift during the year (new Accord likely end-2018 or 2019), while capitalising on the still strong demand for existing line up – City, Jazz, CRV and BRV models. With the exception of Odyssey and Civic Type-R, all Honda models are CKD, assembled in Honda’s manufacturing facilities in Alor Gajah.

Honda has been benefitting from NAP 2014 initiatives, given its high localization rate of 70%, introduction of EEV models and expansion of its production plant to 100-110k units p.a.

Despite the current high utilization rate of 100%, Honda is not in a hurry to further expand its manufacturing capacity, given the relatively mature Malaysia automotive market and current unfavourable consumer sentiments. Management indicated its ongoing initiatives to further improve plant and process efficiencies in order to meet any peak demand in the short term. We believe Honda is currently in talks with government and principal Honda Japan for potential export initiatives for hybrid models (before any concrete plan for further expansion), as regional markets start to mature with supporting infrastructure, while government initiative and regulation are being put in place to encourage environmental friendly vehicles on the road.

After achieving a record earnings of RM660.4m in FY03/17 (See Figure #1), Honda is expected to achieve another record year earnings in FY03/18-19 as the OEM gains from higher sales volume, better sales mix and appreciation of RM against JPY and USD.

CTRM (96.87% Owned by DRB). CTRM has a strong advantage of being a single producer globally for the many parts and components (mainly wings and fan cowl) of Airbus and Boeing aircrafts. Hence, CTRM production lifecycle is tandem with the lifecycle of the aircraft programs with may last for more than 20 years. Currently CTRM has an outstanding orderbook of RM9.5bn (>10x of annual revenue).

In line with the continuous growing demand for Airbus A320 and new Airbus A350, CTRM has completed expansion with new Building 5 (dedicated for fan cowl program for A350s) in 2017 and currently in the midst of further capacity expansion with new Building 6 (dedicated for wing program for A320s) in order to meet the increasing demand for composite components. Its current average capacity utilization is already above 80%.

DRB is in talks with Petronas to acquire the remaining 3.13% stake in CTRM. Note that DRB acquired 96.87% stake in CTRM from Ministry of Finance for RM298.3m (including loan settlement of RM176.2m) back in Nov 2013, based on 1.0x P/B and 14.8x P/E.

For FY03/16-17, PBT margins have declined marginally to 5.4% from 6.1% in FY03/15 due to depreciation of GBP (part of the revenue) and restructuring exercises (See Figure #2). Moving forward, management expects PBT margins to gradually improve to 7.5% along with the production increase and stabilization of GBP. CTRM is currently enjoying tax incentives from the government, lowering effective tax rate below 10%. The tax incentives may last for more than another 5 years.

Forecast. Unchanged.

Maintain BUY With SOP Derived TP: RM2.88. With the emergence of Geely as strategic foreign shareholder for Proton, we can expect re-rating catalyst on DRB’s valuation.

Source: Hong Leong Investment Bank Research - 24 Apr 2018