This article first appeared in The Edge Financial Daily on August 27, 2019
DRB-Hicom Bhd
(Aug 26, RM2.60)
Maintain buy with an unchanged fair value (FV) of RM3.18: We maintain our “buy” recommendation for DRB-Hicom Bhd with an unchanged sum-of-parts-(SOP)-based FV of RM3.18 per share.
As announced in July, DRB-Hicom has changed its financial year end to Dec 31 from March 31. Therefore, we refine our estimates to cover the nine-month period ending Dec 31, 2019 instead of the original 12 months.
DRB-Hicom’s first quarter of financial year 2019 (1QFY19) core net profit of RM45.6 million was in line with our expectations, accounting for 34% of our estimates. As it is only 1Q earnings, we are keeping our estimates unchanged. We expect DRB-Hicom’s earnings to be less volatile going forward after the group’s automotive segment convincingly returned to the black in the previous quarter.
DRB-Hicom’s automotive division recorded a higher revenue of RM2.2 billion (+8% quarter on quarter [q-o-q], +59% year on year [y-o-y] and a profit before tax [PBT] of RM122 million.) The drop in q-o-q PBT was due to: i) the timing of completion of AV-8 under the defence segment; ii) favourable changes to product mix; and iii) write-backs of unutilised provisions in 4QFY18.
Based on our on-the-back-of-the-envelope estimates, Proton has registered yet another quarter of operating profit, similar to 4QFY18. In 1QFY19, Proton delivered 25.2 thousand units of vehicles (+38% q-o-q, +77% y-o-y) whereby the X70 comprised 6,600 of the total sales (-23% q-o-q).
DRB-Hicom’s services division posted a lower revenue of RM1.1 billion (-10% q-o-q, -2% y-o-y) and a PBT of RM26.6 million (-1% q-o-q, -53% y-o-y). We witnessed drags with lower revenues in all of the subsegments in the services division except for education.
Notable drags on its earnings included the logistics business which recorded a lower revenue of RM547 million (-3% q-o-q, - 3% y-o-y). The business was impacted by a competitive business environment which faces price and cost challenges. The group said it is making ongoing efforts to address the issues faced mainly by Pos Malaysia.
DRB-Hicom’s property, asset and construction division reported a revenue of RM115.4 million (-35% q-o-q, -19% y-o-y) and a lower PBT of RM17.1 million (-87% q-o-q, - 43% y-o-y). This was mainly due to lower revenue recognised by the division’s construction-related projects — namely Media City Development.
Proton’s turnaround is gradually gaining traction through its impressive sales volume momentum while the upcoming introduction of the X70 and X50 complete knock-down is expected to sustain the strong sales of vehicles seen recently.
There remains potential upside to the DRB-Hicom’s share price due to the group’s ongoing aggressive efforts to revive and win investors’ confidence in the Proton brand. — AmInvestment Bank, Aug 26