DRB-Hicom’s auto sales will remain solid

By AZALEA AZUAR / File Pic TMR

DRB-HICOM Bhd will continue to post strong growth in automotive sales, backed by Proton Holdings Bhd’s robust growth momentum expected over the next few years.

Hong Leong Investment Bank Bhd Research (HLIB Research) analyst Daniel Wong said Proton’s turnaround in the third quarter (3Q) was driven primarily by the launch of the X50, which has received overwhelming bookings of 30,000 units, although the production rate is at 3,000 to 4,000 units per month.

“We expect another flagship sedan model launch in 2021, along with some facelift or update of existing models to further excite the market and increase its market share,” Wong noted in a report yesterday.

Proton’s turnaround was also attributed to the ongoing improvement in cost management over the years, which include improving efficiency and reducing defects.

“Management remains confident of Proton’s 10-year turnaround plan to become the leading marque in Malaysia and top three in the region,” Wong stated.

HLIB Research has maintained a ‘Buy’ call on DRB-Hicom Bhd with an unchanged target price of RM2.45.

“We remain positive on DRB- Hicom’s outlook as it continues to enjoy strong automotive sales growth with attractive model line-up from Proton, Honda and Mitsubishi, as well as the implementation of Sales and Services Tax exemptions,” Wong noted.

The group is also prepared to brace a possible slowdown in 4Q due to the implementation of Targeted Enhanced Movement Control Order and Conditional CMCO 2.0 in supply chain disruptions for Proton X50 and X70.

In other parts of DRB-Hicom’s automotive segments, the latest Honda City model has received more than 9,000 bookings, which have allowed Honda’s sales to recover strongly.

Mitsubishi’s latest Xpander has also received bookings for more than 2,500 units and it will be completely knocked-down in Pekan.

However, the same fate does not apply to Mercedes production as they have not been ramped up in the past months due to supply constraints.

DRB-Hicom also does not see any material traction at the current juncture on potential electric vehicle (EV) developments.

“The main concern raised was the readiness of supporting infrastructure development in the country, as well as government support for an EV programme.

“However, they might consider Proton joining the existing EV platforms such as London EV Taxi, Lynk & Co and Volvo/Polestar, which are owned by shareholder Zhejiang Geely Holding Group Co Ltd,” Wong noted.

Supply disruptions caused by the Covid-19 pandemic has affected DRB’s aviation segment, DRB- Hicom Defence Technologies Sdn Bhd (Deftech), resulting in the renegotiation of the delivery of DefTech AV8 Gempita.

Meanwhile, Composites Technology Research Malaysia Sdn Bhd has seen its production fall by 30% to 40%, as the overall aviation sector is severely affected by Covid-19.

DRB-Hicom’s management implied no cancellation of contracts and expects both units to recover along with the aviation market. Bank Muamalat Malaysia Bhd also showed signs of recovery in 3Q20. The bank suffered a modification loss accounting of RM46.2 million in the preceding quarter.

“Nevertheless, management has been prudent in cost management and restructuring the business given the changing environment, as well as to address the deteriorated net interest margin in the near-term due to the 1.25% year-to-date Overnight Policy Rate cut,” Wong stated.

Pos Malaysia Bhd also showed strong improvements in 3Q20 driven by effective postal tariff hikes in February 2020 and higher courier volume from a spike in e-commerce trend.

“We expect Pos Malaysia to register a turnaround in 4Q20 and 2021, mainly driven by the postal segment,” the analyst said.

On DRB-Hicom’s properties segment, Wong said the proposed asset swap for 1,243.45 acres (503.21ha) of freehold land in Johor had been delayed until year-end. The postponement will see DRB- Hicom recognise a gain of RM849.4 million. The land is valued at RM1.6 billion and RM288.7 million in cash.

“The contribution from the segment is expected to be stable with ongoing construction income and concession fees for the Northern Gateway immigration, customs, quarantine and security complex and Media City to complete in the second half of 2021,” Wong stated.