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This article first appeared in The Edge Financial Daily on April 30, 2018

DRB-Hicom Bhd
(April 27, RM2.16)
Maintain neutral with a target price (TP) of RM2.19:
We recently visited Honda Malaysia and Composite Technology Research Malaysia (CTRM) facilities in Melaka, which DRB-Hicom Bhd holds 34% and 96.87% stakes respectively. We understand that Honda is not looking to expand its current production capacity for the next three to four years on a softer automotive market. Despite a flat sales volume target by Honda at 109,000 units, it expects its bottom line to continue to improve on a better sales mix by focusing on sales of higher-value models. Meanwhile, CTRM has successfully turn around the business from a pre-tax loss of RM50.3 million in financial year 2014 (FY14) with a three-year compound annual growth rate (CAGR) of 27.8% to FY18. Going forward, we expect to see some improvement in its automotive division on a positive impact from Proton’s partnership with Geely. We maintain our “neutral” call on DRB-Hicom with an unchanged TP of RM2.19.

 

Honda has the highest market share of 36.2% among non-national brands in Malaysia. As at 2017, Honda had achieved the highest recorded sales volume of 109,000 units sold. The plant has a production capacity of 110,000 units, with two production lines. It locally assembles seven models (City, Jazz, HR-V, BRV, Civic, Accord and CRV), with about 70% to 80% of local content. It has a total of 3,325 local staff and 96 dealers. Under Honda Global, Honda Malaysia is ranked among the top nine in terms of revenue, but the second highest based on sales volume. Honda Malaysia will remain focused on the Malaysian market, as Honda already has assembly plants in the Philippines, Thailand and Indonesia. We expect no new model launches in 2018, with the new Accord only available by 2019.

CTRM is involved in lightweight composite components, particularly in the aviation industry, for example “fan cowls” (door to engine), wing parts and so on. Its main customers are the world’s largest aero structure manufacturers — Spirit AeroSystems and UTC Aerospace Systems — and supplies the components to Airbus and Boeing. Since its acquisition in November 2013, it has successfully turn around the business from a pre-tax loss of RM50.3 million in FY14 to a profit before tax of RM48.6 million in FY18 (three-year CAGR of 27.8%). As at March 2018, it had reported a revenue of RM921.9 million, which accounted for about 7% of the group’s top line and about 35% of our forecasts for the defence and aviation segment.

To date, it has an order book of RM9.5 billion until 2031. It is expanding its capacity, with total investment of RM140.7 million. The new building is expected to be commissioned by end-2018, which will generate a yearly revenue contribution of about RM205 million. We believe CTRM will help enhance the group’s defence and aviation segment in the automotive division. — PublicInvest Research, April 27

 

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