DRBHCOM’s 1QFY23 results beat expectations. Earnings were driven by strong sales of Proton, Mitsubishi and Isuzu vehicles,  and a good showing from associate Honda Malaysia (stemming from a high production volume for high-margin HR-V). Honda  Malaysia plans to launch Honda WR-V by 3QFY23 to target the small SUV segment. We raise our FY23-24F net profit forecasts by  7% and 9%, respectively, lift our TP by 4% to RM1.45 (from  RM1.40) but maintain our MARKET PERFORM call.

DRBHCOM’s 1QFY23 earnings beat expectations, making up 37% and  33% of our full-year forecast and the full-year consensus estimate,  respectively. The key variance against our forecast came from a better showing from 34%-owned associate Honda Malaysia.

YoY, 1QFY23 revenue rose 34% YoY driven by: (i) strong automotive sales by Proton at 39,871 units (+56%), Mitsubishi at 6,182 units (+5%), and Isuzu at 4,014 units (+17%), (ii) improving aviation segment with the re-opening of international borders which drove sales for aerospace  & defence segment (+5%) as well as services segment (+11%), and (iii)  higher financing income from Bank Muamalat (+33%). Associates recorded a strong share of profit at RM78m (+132%) at 34%-owned  Honda Malaysia driven by favourable production mix toward high-margin HR-V despite dwindling sales unit (-14% to 17,507 units).

Overall, it returned to the black with a core net profit of RM109m (excluding one-offs at RM1m) 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, (iii) lower postal division’s losses on unrelenting cost cutting initiatives, and (iv) recovery in aviation industry.

QoQ, 1QFY23 revenue decreased by 6% mainly from weak aerospace &  defence segment (-50%) with the delivery of the last batch of 18 units  AV8 to MINDEF in 4QFY22, as well as slowdown in automotive sector (- 2%) from the record base of prior year-end that was boosted by  promotional campaign. Nonetheless, the postal segment’s losses more than halved on better cost absorption as volumes recovered and was further boosted by the share of profit from associates (+337%), mainly contributed by Honda Malaysia, driven by favourable sales mix skewed towards the high-margin Honda HR-V, and significant reduction in costs as prices of commodities and key components have since softened. Consequentially, core net profit rose 42%.

Forecasts. We raise our FY23-24F net profit forecasts by 7% and 9%,  respectively, to account for stronger contribution from associate, Honda  Malaysia, driven by the production of best-selling HR-V, and upcoming new production of the all-new Honda WR-V (to fill the void in Honda offerings of small-SUV, by 3QFY23). We raise our Honda sales assumption to 80k units (from 75k units) to match Honda Malaysia’s guidance, and to 85k units (from 78k units) for FY24. No change to our  Proton sales assumptions of 140k units for FY23 and 142k units for  FY24.

Consequently, we raise our Sum-of-Parts (SoP)-derived TP by 4% to  RM1.45 (from RM1.40) (see Page 3). There is no adjustment to our 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 - 29 May 2023