DRBHCOM’s 1HFY23 results met expectations. Its 1HFY23 core net profit soared 83% driven by strong vehicle sales across marques, better distribution margins from new models, and improved earnings from Honda Malaysia and Bank Muamalat. We maintain our forecasts, TP of RM1.45 and MARKET PERFORM call

DRBHCOM’s 1HFY23 results met expectations at 48% of both our full year forecast and the full-year consensus estimate.

YoY, its 1HFY23 revenue rose 22% YoY driven by: (i) automotive sales (+28%) by Proton at 77,321 units (+29%), Mitsubishi at 11,811 units (- 6%), and Isuzu at 8,504 units (+17%), (ii) improving aviation segment with the re-opening of international borders which drove sales for aerospace & defence segment (+1%), as well as services segment (+13%), and (iii) higher financing income from Bank Muamalat (+37%).

Its net profit soared by a larger 83% driven by: (i) improved overall distribution margins underpinned by high-margin new models, i.e. X50 and Honda City, (ii) a steep jump in share of associates’ profits (+78%) driven by 34%-owned Honda Malaysia on a favourable production mix skewed toward high-margin HR-V despite softened sales volume (-15% to 33,727 units), and (iii) a strong showing from Bank Muamalat.

QoQ, its 2QFY23 revenue decreased by 3% mainly from weak aerospace & defence segment (-14%) due to the delay in defence contract renewal, and slowdown in automotive sector (-6%) due to shorter working months on the back of consecutive public holidays in April and June 2023. Its core net profit plunged by a larger 59% as its share of associates’ profits fell 53% due to Honda Malaysia closing for a week each during both Eid-ul public holidays for scheduled maintenance.

Forecasts. Maintained.

We also maintained our Sum-of-Parts (SoP)-derived TP at RM1.45 (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 - 25 Aug 2023