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DRB-Hicom to gain from gradual economic reopening

DRB-Hicom to gain from gradual economic reopening

19 Aug 2021

The group will be riding on Proton’s recovery with the reopening of the automotive sector

DRB-HICOM Bhd’s prospects are expected to improve in the second half of 2021 (2H21), riding on Proton’s recovery with the reopening of the automotive sector’s assembly plants and showrooms.

CGS-CIMB Securities Sdn Bhd analyst Mohd Shanaz Noor Azam, in a research note yesterday, stated that DRB-Hicom’s revenue in the second quarter of 2021 (2Q21) fell by 25% quarter-on-quarter (QoQ) to RM2.6 billion due to lower contributions from all three divisions — automotive (31%), services (8%) and property (21%) — following the impact of the nationwide Movement Control Order (MCO) imposed in May and June this year.

Proton’s revenue slid 35% QoQ in 2Q21 due to a 25% decline in sales volume. Pos Malaysia Bhd also reported a 10% QoQ drop in revenue due to lower mail and parcel volume handled, especially from contract customers.

Overall, DRB-Hicom registered a wider RM217 million headline net loss in 2Q21 from a RM17 million net loss in 1Q21.

Stripping out exceptional items like impairment loss on property, plant and equipment, and allowance for doubtful debts, DRBHicom posted a lower RM130 million core net loss in 2Q21.

Mohd Shanaz noted that the group’s revenue in 1H21 rose 29% year-on-year to RM6.1 billion, mainly due to higher sales at Proton, automotive components and distribution segments, and on the back of the sales tax holiday and low base effect with the first MCO in March-May 2020.

The group posted a lower core net loss of RM152 million in 1H21 against RM199 million core net loss in 1H20.

“We cut our FY21-23F earnings per share to reflect lower sales volume at Proton and widening losses at Pos Malaysia. We have also revise down Proton’s 2021F sales forecast from 130,000 to 110,000 units, due to delay in the re-opening of the automotive sector, which is in line with Malaysian Automotive Association’s total industry volume revision.

“Nevertheless, we are optimistic for a stronger 2H21, following the government’s decision to allow automotive assembly plants and showrooms to re-open from Aug 16 onwards, subject to strict standard operating procedures (SOPs) and based on employee vaccination rate,” he said.

CGS-CIMB kept its ‘Hold’ rating on the stock, with a lower SOPs-based target price (TP) of RM1.65 and on the belief the current valuation is reflective of weaker earnings outlook for the group in the near term.

Mohd Shanaz foresees stronger sales volume recovery from Proton and Honda, extension in sales tax holiday beyond 2021, narrowing losses from Pos Malaysia, new contract wins for DRB-HICOM Defence Technologies Sdn Bhd and appreciation in ringgit against US dollar as potential re-rating catalysts for the stock.

Key downside risks are disruption in the auto supply chain situation due to the Covid-19 pandemic, widening losses at Pos Malaysia due to intense competition, and decline in market share and depreciation in ringgit against the US dollar, he added.

Public Investment Bank Bhd (PublicInvest) also expects a better performance from DRB-Hicom in the coming quarters due to gradual economic sector re-openings as the country transitions through the various phases of the National Recovery Plan.

“While we leave estimates unchanged, we caution on the possibility that it may be missed given ongoing uncertainties. We remain affirmed of its growth prospects going into 2022, however, and retain our ‘Outperform’ call on DRB-Hicom with an unchanged TP of RM2,” the investment bank noted in a report yesterday.

PublicInvest expects vehicle sales to recover strongly in the months ahead due to pent-up demand with the recent easing of movement restrictions where another 11 businesses have been allowed to re-open, underpinned by the current sales and service tax (SST) exemption till this year-end.

Source: The Malaysian Reserve