Persistent part shortages faced by DRBHCOM have resulted in sub-optimal production levels for its Proton and Honda vehicles. Furthermore, costs remain elevated due to high-cost inventory, high freight cost and unfavourable forex. Despite the challenges, it plans to roll out two new Proton EV models this year, to be followed by another six more over the medium term. We cut our FY23-24F net profit forecast by 11-12%, and TP by 13% to RM1.40 (from RM1.60), and maintain our MARKET PERFORM call.

The key takeaways from its results briefing yesterday are as follows:

1. DRBHCOM guided a new 2023 target of 140k unit (+3%) for Proton, and around 80k units (flat) for Honda. On the other hand, for other brands under DRBHCOM, Mitsubishi and Isuzu sales are seen subdued due to limited new model offerings. We keep our target for Proton and Honda at 140k units and 75k units for FY23, and 142k units and 78k units for FY24, respectively.

2. DRBHCOM shared that its booking backlogs remain high at 60k units as of February 2023, which is higher than January 2023 of 55k units, indicating that deliveries have been replenished with new bookings, but we believe it is also partly due to slower deliveries due to sub-optimum production level.

3. In the EV space, it plans to roll out two new Proton EV models this year (we believe they are the Proton X90 and SMART EV). It has lined up another six new EV models over the medium term. Proton X90 will be Proton's first-ever hybrid or mild hybrid electric vehicle (MHEV), while SMART EV will be the first step for Proton to penetrate into the battery electric vehicle (BEV) market. Proton’s transition to EV is divided into three phases, comprising Phase 1 in 2023-2027 (EV Pioneering), Phase 2 in 2025-2030 (EV growth), and Phase 3 in 2027-2030 (EV right-hand development hub).

4. Due to persistent part shortages, DRBHCOM’s production of Proton and Honda vehicles is at sub-optimum levels. Furthermore, costs remain elevated due to high-cost inventory, high freight cost, and unfavourable forex.

Forecasts. We cut our FY23-24F net profit forecast by 11-12%, to reflect lower margins at its automotive segment at 4% (from 5% previously).

We reduced our sum-of-parts (SoP) derived TP by 13% to RM1.40 (from RM1.60) (see Page 2). There is no adjustment to TP based on ESG given a 3-star rating as appraised by us (see Page 5).

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 outlook has weakened with rival Perodua turning up the heat with aggressive new launches. Maintain MARKET PERFORM.

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 - 3 Mar 2023