Post meeting with management, we remain positive on DRB’s outlook. The group showed a strong turnaround for its core profit to RM216.6m in 4QFY21 (vs. RM6.9m in 4QFY20; -RM162.3m in 3QFY21), driven mainly by automotive segment. Proton continued to show promising performance on the back of strong demand. Management targets continued growth of +18.6%-30.8% of sales volume in FY22. Similarly Honda also targetes to regain market share with sales target of 80k units in FY22 with attractive new launches. PosM has seen lower core losses in 4QFY21 under the new management. New initiatives and digitalization plans have been identified and are being implemented, which managements targets to breakeven by end-2022. We reiterate our BUY recommendation on DRB with unchanged TP: RM2.30 based on 25% discount to SOP: RM3.06.

Proton turnaround. Proton made a strong comeback in 4QFY21, driving strong OPBT (operating profit before tax) to RM245.9m for automotive segment (vs. RM135.2m in 4QFY20; -RM170.1m in 3QFY21), on the back of 40.5k unit sales during the quarter (+15.7% YoY; +171.6% QoQ). Barring unforeseen circumstances, management expects overall automotive OPBT margins (8.1% in 4QFY21) to sustain in FY22, mainly supported by Proton sales. Proton has set a target of 136 - 150k units (+18.6%-30.8% YoY) for FY22, which includes export volume (mainly driven by high demand in Pakistan). Proton will continue to ramp up production in FY22 in order to meet the high order backlog of 60k units. Proton has secured enough microchip supplies to meet the current demand. New model launches are expected to be rescheduled to FY23 to focus on current high order demand and resolving supply chain situation. Reccognising the emerging trends of EV market, Proton would most likely venture straight into BEV by 2027 (only minor stepping stone onto the hybrid segment).

Other autos. In FY21, Honda was affected by the microchip shortage, on-going lockdowns and pandemic-related issues, resulting to delay in new model launches to early-FY22. Honda is set to regain its market share with a sales target of 80k units in FY22. On the other hand, Mitsubishi gained strong position in FY21, driven mainly by newly introduced Xpander. Sales are expected to sustain into FY22.

Deftech/CTRM. Both Deftech and CTRM were affected by Covid-19 in FY21. With the completion delivery of AV8 in FY22, management expects contribution to drop until Deftech is able to secure a new major defence contract. Conversely, CTRM is expected to ramp up production, leveraging on the recovery of the global aviation sector in FY22. CTRM is also bidding for new contracts to expand its orderbook.

Land development. Management highlighted the development of Automotive High Technology Valley in Tg. Malim, which will involve RM32bn investment value, mainly to attract investments into high-tech manufacturing and R&D centres and institutions to support/complement Proton’s future development. The RM32bn investment value would be derived not only from DRB-HICOM group of companies, but also potential partners, vendors, OEMs and investors. The investment also includes township developments and outlays on infrastructure and amenities to turn Proton City into a Smart Automotive Hub on EV and digitalization, including R&D facilities to study suitable EV value chain within tropical climates.

PosM. 53.5% owned PosM continued to drag the group’s bottom-line with ongoing losses. Nevertheless, the unit posted lower core losses QoQ, with on-going restructuring exercises under the new management team. Management recognised PosM was disadvantaged with the lack of competitive experiences given its long history under regulated structure. Various initiatives and digitalization efforts have been identified, which will enable improved competitiveness of its products offerings and customer service levels, while at the same time improve operational costs structure. Management previously targeted to breakeven by end of FY22.

Forecast. Unchanged.

RM2.30. Maintain BUY with unchanged TP: RM2.30, based on unchanged 25% discount to SOP: RM3.06. We remain positive on DRB’s outlook on strong automotive sales growth, leveraging on SST exemptions and attractive model line-up from Proton, Honda and Mitsubishi. DRB also has a strong leverage o nto the robust growth momentum of Proton.

Source: Hong Leong Investment Bank Research - 24 Mar 2022