This article first appeared in The Edge Financial Daily on December 3, 2018
DRB-Hicom Bhd
(Nov 30, RM1.85)
Maintain buy with an unchanged target price of RM2.80: DRB-Hicom Bhd reported a core profit after tax and minority interest (Patmi) of RM3.3 million for its second quarter of financial year 2019 (2QFY19), lowering core loss after tax and minority interest (Latmi) for the cumulative first six months of FY19 (1HFY19) to RM12.8 million, against HLIB Research’s FY19 forecast profit of RM77.7 million and consensus forecast of RM55.6 million. We deem the result within expectations, as we expect meaningful earnings recovery in 2HFY19 when Proton launches the highly anticipated X70 sport utility vehicle (SUV) model (based on Geely Boyue) by end of calendar year 2018.
On a quarter-on-quarter basis, the group reported a minor core Patmi of RM3.3 million for 2QFY19 from a core loss of RM16 million in 1QFY19, mainly driven by an improved group automotive sales volume in lieu of the goods and services tax zero-rated period in the months of July and August, being partially offset by the loss in 53.5%-owned Pos Malaysia Bhd. On a year-on-year basis, similarly, Patmi returned to the black from a core loss of RM133.6 million in 2QFY18, due to an improved group automotive sales volume during the quarter and a partial loss in Proton now being attributed to Geely, post 49.9% stake dilution in Proton to Geely (since 3QFY18). Year to date, DRB-Hicom still reported a small core Latmi of RM12.8 million, a significant improvement from RM305.7 million in 1HFY18, due to an improved group automotive sales volume during 2QFY19 and a partial loss in Proton now being attributed to Geely, post 49.9% stake dilution in Proton to Geely (since 3QFY18).
Proton’s turnaround remains as the key catalyst for DRB-Hicom’s earnings growth. The upcoming new X70 SUV model had received a strong pre-launch booking of 12,000 units by end-November 2018. Proton is confident the new model is a good starting point, leading to Proton’s turnaround. Proton is expected to introduce another two Geely-based models, namely SX11 (a smaller SUV model known as Geely Bin Yue) and Geely VF11 (a multipurpose vehicle model), within the next two years in order to push for a stronger sales volume. With Geely as Proton’s shareholder and foreign strategic partner, we are confident of Geely’s commitment to Proton’s turnaround. Proton will eventually leverage on Geely to expand into China market and regional Asean market.
DRB-Hicom has received shareholders’ approval for the asset/land swap exercise with major shareholder Tan Sri Syed Mokhtar Al-Bukhary, valuing the asset/land at RM1.9 billion (including cash RM289 million) as well as the disposal of Alam Flora to Malakoff for RM945 million cash. The exercises will improve DRB-Hicom’s balance sheet and allow DRB-Hicom’s structure to be lean and to remain focus. — Hong Leong Investment Bank Research, Nov 30