This article first appeared in The Edge Malaysia Weekly on October 5, 2020 - October 11, 2020

The Covid-19 pandemic and sluggish economy notwithstanding, Proton Holdings Bhd achieved a hat-trick in September when it sold 11,935 vehicles, marking the third consecutive month it had registered sales of more than 11,000 units.

The numbers were 12.5% and 4.9% higher year on year and month on month respectively.

Year to date, Proton has sold 73,607 units, 4.3% more than a year ago.

Perhaps more significantly, Proton is the only major automotive brand to have bucked the trend of declining automotive sales so far this year, which is a boon for its 50.1%-shareholder DRB-Hicom Bhd.

Proton Edar CEO Roslan Abdullah believes Malaysia’s automotive market has achieved a measure of stability post-Movement Control Order (MCO), given that total industry volume has exceeded 50,000 units for three straight months.

“At Proton, we are relieved and confident because our results are showing consistency, as we have beaten our monthly sales numbers from the previous year. This is a clear indicator of a return to a sustainable sales volume,” says Roslan in a press release announcing the carmaker’s sales figures last Friday.

Proton’s strong sales performance is one of the key reasons analysts are bullish on DRB-Hicom, with six out of seven analysts covering the counter calling the stock a “buy”.

Wan Mustaqim Wan Abdul Aziz of Kenanga Research is the only contrarian with a “sell” call, but he declined to say why when contacted by The Edge, as he will be publishing a new strategy report on the automotive industry this week.

“Just to note that DRB-Hicom is not only about Proton because its earnings came in as a conglomerate,” says Mustaqim in an email, but declined to divulge whether he will be upgrading his call on DRB-Hicom in the new strategy report.

Nevertheless, he adds that Proton and Pos Malaysia Bhd — a 53.5%-owned subsidiary of DRB-Hicom — are still in the restructuring phase and could post volatile earnings over the next two to three years.

Still, some observers question whether the transformation of Proton and Pos Malaysia has been priced into DRB-Hicom’s share price as it has yet to breach the RM2.20 level despite the companies’ improved performance.

Since March 19, DRB-Hicom’s share price has rallied 82% to RM2. However, the counter has been stuck at the RM2 to RM2.20 band since Aug 21 as if awaiting a price catalyst.

Part of the reason could be DRB-Hicom’s own performance. Despite Proton’s stellar sales and the steady turnaround of Pos Malaysia, DRB-Hicom remains loss-making. In fact, its losses have widened. In the first half ended June 30, 2020 (1HFY2020), the conglomerate recorded a net loss of RM479.4 million against a loss of RM156.23 million a year ago.

The deeper losses were due to the MCO, which caused the economy to grind to a halt in late March, before some measures were relaxed in May. The loan repayment moratorium also impacted the profitability of Bank Muamalat (M) Bhd, a 70%-owned subsidiary of DRB-Hicom.

The conglomerate has three core business segments — automotive, services, and property, assets and construction (PAC). Apart from Proton Holdings, DRB-Hicom also holds a stake in Honda Malaysia Sdn Bhd under its automotive segment.

Also parked under the automotive segment is its defence business. This includes DRB-Hicom Defence Technologies Sdn Bhd, which produces armoured vehicles for the Malaysian Armed Forces. The group also produces automotive parts through various subsidiaries and joint-venture companies.

In the services segment, besides its stake in Pos Malaysia and Bank Muamalat, DRB-Hicom also owns a 100% stake in Puspakom Sdn Bhd. Meanwhile, it has various property development and construction projects, with the biggest one being the construction of Media City in Angkasapuri.

The bullish outlook on DRB-Hicom’s shares is based on the transformation stories of its two biggest subsidiaries, Proton and Pos Malaysia. In the nine-month financial period ended Dec 31, 2019 (9MFY2019), Proton recorded a net profit of RM169.35 million on the back of RM4.65 billion in revenue.

It was the first net profit recorded by Proton since financial year ended March 31, 2011 (FY2011) — its last financial year as a listed entity. The results are based on a nine-month period, as DRB-Hicom changed its year-end to Dec 31 from March 31 last year.

Proton’s turnaround started with the entry of Zhejiang Geely Holding Group Co Ltd as a strategic partner through a 49.9% stake in 2017. After the introduction of the X70 SUV in late 2018 and improvements in the brand’s build and service quality, Proton’s fortunes started to improve.

Transformation initiatives instituted by CEO Dr Li Chunrong propelled Proton’s sales by 55.7% to 100,821 units in 2019, the first time the carmaker had breached the 100,000-unit level since 2015.

The good run on Proton’s year-to-date sales have prompted “buy” calls on DRB-Hicom, with the average target price at RM2.32 against its current price of RM2, signifying a potential upside of 16%.

Hong Leong Investment Bank Research analyst Daniel Wong has a “buy” call on DRB-Hicom with a target price of RM2.52, despite the group’s net loss of RM479.4 million in the first half of financial year ending Dec 31, 2020.

He expects DRB-Hicom to chalk up a strong rebound in automotive sales in the second half of the year, driven by the government’s exemption of sales tax between June 15 and Dec 31.

“We remain positive on DRB-Hicom’s outlook as it continues to enjoy strong automotive sales growth, leveraging SST (Sales and Services tax) exemptions, along with an attractive model line-up from Proton, Honda and Mitsubishi,” says Wong in a Sept 1 report.

Meanwhile, Pos Malaysia is undergoing a transformation by divesting its non-core assets and leveraging technology to improve its courier and parcel business. The MCO has also led to more demand for PosLaju’s express service.

During an exclusive interview with The Edge recently, Pos Malaysia CEO Syed Md Najib Syed Md Noor said he is confident the group will post a profit in financial year ending Dec 31, 2021 — a year ahead of its original target.

Although still in the red, Pos Malaysia has managed to narrow its net loss to RM19 million in the second quarter ended June 30, 2020, from RM49.2 million in the preceding quarter and RM171.4 million in the fourth quarter last year.

However, analysts are divided in their views when it comes to Pos Malaysia. Of the six analysts who cover the counter, two have “buy” calls, three have “hold” recommendations and one a “sell” rating, with an average target price of RM1.03.

Nazira Abdullah of Hong Leong Investment Bank Research has ascribed a target price of RM1.20 as she expects the group to do better in the second half of the year, benefiting from high courier volume and the full impact of a tariff revision on postage.

Given these developments, is the market prepared to believe that there is still more value in DRB-Hicom?

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