DRBHCOM’s 1HFY22 results disappointed due to weak margins that negated sales growth. We expect its automotive sales to slow after delivering SST-exemption order backlogs in the absence of new models (unlike its competitors). Not helping either is its defence segment that is losing out on new contracts. We cut our FY22F and FY23F net profit by 52% and 39%, respectively, lower our SoP-based TP by 14% to RM1.55 (from RM1.80). Downgrade to MARKET PERFORM from OUTPERFORM.

1HFY22 results were below expectations with a core profit of RM24m making up 12%/14% of house/street’s FY22 forecasts. Core earnings were adjusted for a RM119.5m gain in relation to the disposal of a former subsidiary company, Lotus Advance Technologies Sdn. Bhd. which had been completed in 2017 and withheld due to termination of certain joint venture contract.

1HFY22 turnover rose 8% YoY driven by: (i) strong automotive sales by Proton at 60,124 units (+4%) with its best-selling models of X70 and X50 as well as strong sales by Mitsubishi Xpander and Triton models, (ii) improving aviation sector with the re-opening of international borders which drove sales for defence sector (+6%) as well as services segment (+10%), and (iii) higher financing income from Bank Muamalat (+7%). Associates recorded a strong share of profit at RM64m from a loss of RM10m driven by strong Honda car sales (+59% to 39,673 units) with its best-selling model of Honda City. Overall, it turned to black recording a core PATAMI of RM24m from core loss of RM179m on: (i) equally strong sales and margins at both automotive distribution channels (due to high-margin new models, i.e. X50 and Honda City), (ii) resilient Bank Muamalat’s earnings (+22%), (iii) lower postal division’s losses on unrelenting cost cutting initiatives, and (iv) recovery in aviation industry.

Outlook. DRB-HICOM's automotive segment remains a driving force for the group’s growth. Proton and Honda are expected strive for a target of 150,000 units (+34%) and 80,000 units (+50%) in 2022, respectively. Defence division is expected to record staggered delivery of the remaining 22 units of AV-8 until end of 2022 while aerospace division will see incremental improvement as international borders reopens. For the postal segment, the on-going turnaround plan focusing primarily on unrelenting cost cutting initiatives and customer-centric strategy is expected to improve its overall performance. Other divisions such as banking, services and properties will continue to operate efficiently by optimising cost management and improving business productivity.

Forecasts. We cut our core PATAMI for FY22F and FY23F by 52% and 39%, respectively, as we tone down our expectation on: (i) margin for all divisions amidst high inflationary operating environment, (ii) sales growth for both Proton and Honda in FY23 to 10% on intense competition, and (iii) flat defence division’s sales for both FY22 and FY23 with no new contract in sight (currently remaining 22 units of AV-8 left to deliver). Downgrade to MARKET PERFORM from OUTPERFORM with a lower Sum-of-Parts (SoP) derived-TP of RM1.55 (from RM1.80). There is no adjustment to our TP based on its 3-star ESG rating as appraised by us (see Page 5).

Risks to our call include: (i) consumers cutting back on discretionary spending (particularly big-ticket items like new cars) amidst high inflation, (ii) persistent disruptions (including chip shortages) in the global automotive supply chain, (iii) further slowdown in capital market activities (Bank Muamalat), and (iv) a global recession hurting the demand for transport services.

Source: Kenanga Research - 26 Aug 2022