Post meeting with management, we remain positive on DRB’s outlook. Proton has registered a profit in 3QFY20 with stronger sales volume and on-going cost cutting measures. Management remains confident with Proton’s long term 10-year business plan. The reception of the recent launched new models has been overwhelming – Proton X50 (30k bookings), Honda City (9k bookings) and Mitsubishi Xpander (2.5k bookings). PosM is on track for turnaround while Deftech, CTRM and Bank Muamalat are expected to remain subdued in the near term, affected by Covid-19. Contribution from property segment is expected to remain stable. We reiterate our BUY recommendation with unchanged TP: RM2.45 based on 25% discount to SOP: RM3.27.

Proton turnaround. Management guided that Proton managed to turnaround in 3QFY20 with the strong car sales rebound as compared to the previous 2 quarters of losses dragged by Covid-19 and implementation of MCO. 4QFY20 may see some slowdown due to implementation of TEMCO/CMCO2.0 in and supply chain disruptions (for X50 and X70 models). On the bright side, the recently launched X50 model has received overwhelming bookings of 30k units (while production rate is only 3-4k units/month). We expect another flagship sedan model launch in 2021, along with some facelift/update of existing models to further excite the market and increase its market share. Proton’s turnaround was also attributed to the on-going improvement in cost management over the years which include improve efficiency and reduce defects. Management remains confident of Proton’s 10 year turnaround plan to become the leading marque in Malaysia and top 3 in the region.

Electric vehicle (EV). In relation to potential EV developments, management has not seen any material traction at current juncture. Mains concern raised was the readiness of supporting infrastructure development in the country as well as government support for an EV program. Nevertheless, we reckon Proton may leverage onto the existing EV platforms (London EV Taxi, Lynk & Co and Volvo/Polestar) owned by shareholder Geely Auto group.

Other autos. Honda sales have recovered strongly with the latest introduction of flagship City model, which received over 9k bookings. Similarly, Mitsubishi’s newly launched Xpander, which will be CKD assembled in Pekan, has received strong bookings of over 2.5k units. However, we noticed that Mercedes productions has not been ramped up for the past months (according to MAA), which we believe due to supply constraints.

Deftech/CTRM. Both Deftech and CTRM have been affected by Covid-19. The delivery of AV8 has been renegotiated to extend into 2021 (supply chain affected as well as postponement by the government), while the group continues to engage with government for replacement contracts. CTRM’s production has dropped by 30-40%, given that the overall aviation sector is severely affected by Covid-19. However, management guided no cancellation of contracts and expects to recover along with the aviation market.

Bank Muamalat. 70% owned Muamalat has shown recovery in 3QFY20, post recognising modification loss accounting of RM46.2m in 2QFY20. Management cautioned for further modification loss in 4QFY20 after the government implemented the targeted loan moratorium extension for B40 group. Nevertheless, management has been prudent in cost management and restructuring the business in view of the changing environment as well as to address the deteriorated net interest margin in the near term (due to YTD 1.25% OPR cut).

PosM. 53.5% owned PosM has shown strong improvement in 3QFY20 with minor losses, driven by effective postal tariff hikes in Feb 2020 and higher courier volume from accelerated e-commerce trend. However, the postal segment growth was partially offset by the losses in logistic and aviation segments, being affected by Covid-19 and MCO. We expect PosM to register a turnaround in 4QFY20 and FY21, mainly driven by the postal segment.

Properties. The finalisation of the proposed property/asset/land swap exercise with major shareholder Tan Sri Syed Mokhtar for 1,243.45 acres of freehold land in Johor (valued at RM1.6bn) and RM288.7m cash, has been further delayed until year end (in which DRB will recognise a gain of RM849.4m). The contribution from the segment is expected to be stable with on-going construction income and concession fees (Northern Gateway ICQS) and Media City (to complete in 2HFY21).

Forecast. Unchanged.

Maintain BUY but with unchanged TP: RM2.45 based on 25% discount to SOP: RM3.27. We remain positive on DRB’s outlook as it continues to enjoy strong automotive sales growth with attractive model line-up from Proton, Honda and Mitsubishi as well as the implementation of SST exemptions. DRB also has strong leverage onto the robust growth momentum of Proton within the next few years.

Source: Hong Leong Investment Bank Research - 3 Dec 2020