DRB-Hicom (DRB) reported sequentially weaker 4QFY23 net profit of RM26.5m (-62.6% QoQ) mainly due to higher losses from postal business and defence subsegment. After stripping off non-operating items, cumulative FY23 core net profit improved by 10.8% YoY to RM271.2m. The results were below both our and consensus estimates, at 89.6% and 86.7% of full-year forecasts respectively. The discrepancies in our results were mainly due to higher losses as a results of intense competition among last-mile delivery players and lower delivery of defence products. We cut our FY24-25 earnings forecast by an average of 20% to reflect escalating competition in the local auto industry, oversupply in last-mile delivery market and lack of new orders replenishment by DEFTECH. Consequently, our sum-of-parts (SOP) based TP is reduced to RM1.70 (from RM2.10). Although our valuation is suggesting an upside of 22%, we cut our rating to Neutral, given a subdued outlook for the auto, postal and defence segments. Also note that property assets account for the bulk of DRB’s valuation, that are not likely to be monetised anytime soon.

• 4QFY23 Revenue declined to RM3.8bn (-13.3% YoY, -5.7% QoQ) largely due to lower auto sales and courier business. Automotive revenue declined to RM2.6bn (-16.3% YoY, -10.7% QoQ) on lower sales volume. PROTON sold 34,143 units in 4QFY23 compared to 39,511 units in 3QFY22 due to competitive markets. Postal sector also posted marginally lower revenue of RM261.4m (-4.8 YoY, -1.4% QoQ) mainly due to drop in courier business. This was somewhat offset by higher financing income from Bank Muamalat (+31.8% YoY) and higher revenue from its Services segment (+18.2% YoY) due to increased demand for in-flight catering business, in line with the growing number of flights. Aerospace & Defence (A&D) segment also registered sequential increase in revenue to RM217.4m (+37.6% QoQ) owing to higher demand for aircraft parts, though weaker YoY (-35.1%) due to lower defense product deliveries following the completion of AV8.

• 4QFY23 Core Net profit fell to RM58.8m (-23.1% YoY, -17.0% QoQ), largely due to higher losses in Postal and A&D segment. Loss before tax (LBT) for Postal business widened QoQ to RM83.8m compared to LBT of RM30.8m in 3QFY23, in line with lower revenue and margin owing to oversupply and cut-throat competition. Major e-commerce players shifting to their insourced delivery capabilities while international e-commerce players continue to capture higher market penetration via undercutting margin strategies. A&D segment also slipped into losses, posted a LBT of RM10.9m compared to profit before tax (PBT) of RM0.6m in 3QFY23 owing to lack of new orders replenishment by DEFTECH. This was partly offset by higher PBT from the Banking sector, in line with higher financing income driven by growth in financing volume attributed to growing customer base. Core business segment, Auto’s PBT shown little change at RM154.9m (+1.6% YoY, -3.9% QoQ), thanks to better sales mix despite lower revenue.

• Subdued outlook. While Malaysia’s Total Industry Volume (TIV) recorded outstanding performance in 2023 with a total of 799,731 new vehicles registered (2023: 721,177 units), TIV is expected to decrease by 7.5% YoY to 740,000 units in 2024. Forward car sales orders are showing signs of easing. A number of factors including elevated living costs, softer demand for discretionary items due to concerns over targeted subsidy rationalisation and lack of catalyst for the auto sector may restrict growth in sales volume. In addition, stiff competition from the influx of new model launches and competitive pricing in the market may pressure sector margins and curb earnings growth despite backlog orders remain robust.

Source: PublicInvest Research - 1 Mar 2024