DRBHCOM’s FY22 results met our forecast but beat consensus estimate. It performed well across the board: auto (strong sales of Proton vehicles), banking (OPR hikes) and aviation (reopening of borders). Nevertheless, we see potential market share loss in the auto segment as rival Perodua ramps up new launches. We cut our FY23F net profit by 16%, TP by 6% to RM1.60 (from RM1.70) and call to MARKET PERFORM from OUTPERFORM.

FY22 earnings met our forecast but beat consensus estimate by 8%. YoY, FY22 revenue rose 25% YoY driven by: (i) strong automotive sales by Proton at 136,026 units (+22%) with its best-selling models of X70 and X50 as well as strong sales by Mitsubishi Xpander and Triton models, (ii) improving aviation segment with the re-opening of international borders which drove sales for aerospace & defence segment (+41%) as well as services segment (+5%), and (iii) higher financing income from Bank Muamalat (+14%). Associates recorded a strong share of profit at RM131m (+244%) driven by strong Honda car sales (+51% to 80,290 units) with its best-selling Honda City.

Overall, it returned to the black with a core net profit of RM304m, excluding impairment loss on assets at RM116.5m (vs. a core loss of RM210m a year ago) driven by: (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 (+23%), (iii) lower postal division’s losses on unrelenting cost cutting initiatives, and (iv) recovery in aviation industry.

QoQ, 4QFY22 revenue decreased by 4% mainly due to slowdown in automotive sector (-10%) as production of Proton and Honda remained sub-optimum due to persistent shortages of chips and components. Proton and Honda recorded weaker unit sales of 37,998 units (-6%) and 20,106 units (-2%), respectively. Not helping, banking income halved due to the year-end loan impairment, while postal segment remained subdued on highly competitive business environment, which overshadowed the recovery in aviation segment. Consequentially, core net profit plunged 47% (excluding impairment loss on assets at RM176.5m).

Forecasts. With Perodua ramping up new launches and setting itself another record sales target, we see a strong possibility of it gaining more market share, especially in the low-end segment. As such, we cut our sales assumptions for Proton and Honda vehicles by 3% and 7% to 140,000 units (+3% yoy) and 75,000 units (-7% yoy), respectively. Also, we widen our net loss forecast for the postal segment (see our Results Note on POS dated 21 Feb 2023).

All in, we cut our FY23F net profit by 16%, introduce our FY24F numbers, reduce our Sum-of-Parts (SoP) derived-TP by 6% to RM1.60 (from RM1.70). There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 5). Downgrade to MARKET PERFORM from OUTPERFORM.

We like DRBHCOM for: (i) being the second largest player in the local automotive sector, second only to Perodua, with a market share of about 30%, (ii) its strong Proton and Honda franchises, and (iii) its improving banking franchise under Bank Muamalat. However, its upside is capped after the recent run-up in share price, coupled with a more competitive landscape in the auto segment with rival Perodua turning up the heat with aggressive new launches.

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) a slowdown in capital market activities (Bank Muamalat), and (iv) a global recession hurting the demand for transport and aviation services.

Source: Kenanga Research - 22 Feb 2023