DRBHCOM’s FY23 results disappointed. Its FY23 core net profit plunged 12% on losses from its postal and aerospace & defence segments, which negated profits from Proton, Honda Malaysia and Bank Muamalat. We cut our FY24F net profit forecast by 10%, lower our TP by 3% to RM1.40 (from RM1.45) and maintain our MARKET PERFORM call.

DRBHCOM’s FY23 core net profit (excluding one-offs at RM30m) missed our forecast and the consensus estimate by 16% and 14% respectively. The key variance against our forecast came from wider losses at its postal and aerospace & defence segments.

YoY, its FY23 revenue rose 2% YoY driven by: (i) automotive sales (+2%) led by Proton at 150,975 units (+11%), Mitsubishi at 21,719 units (-10%), and Isuzu at 16,908 units (+7%), (ii) services segment (+13%), and (iii) higher financing income from Bank Muamalat (+35%). These more than offset the weakening sales from: (i) aerospace & defence (- 21%) due to lower delivery of defence products despite improving aviation sector, and (ii) postal (-13%) due to deteriorating operating environment. Its share of associates’ profit (+31%) was higher riding on improved sales volume from 34%-owned Honda Malaysia (+0% to 80,027 units).

However, its net profit plunged 12% largely due to wider losses from postal segment in 4Q on a highly competitive business environment as well as aerospace & defence segment turning into losses due to low deliveries.

QoQ, its 4QFY23 revenue decreased by 6% largely due to lower automotive sales (-11%) with weaker Proton sales at 36,169 units (-4%) from aggressive promotion by the competitors as well as weaker Postal (- 1%) segment. These more than negated the stronger contribution from: (i) aerospace & defence segment (+38%) on the recovery in the aviation sector, (ii) Bank Muamalat due to higher financing income from (+1%), and (iii) services segment (+9%). Its net profit plunged by a larger 66% due to wider losses from its postal, aerospace & defence and services segments as competition intensified.

Forecasts. We cut our FY24F net profit forecast by 10% as we widen our net loss forecasts for its postal and aerospace & defence segments (see our Results Note on POS dated 29 Feb 2024). We introduce FY25F core net profit of RM359m (+17%).

Valuations. We also reduce our Sum-of-Parts (SoP)-derived TP by 3% to RM1.40 from RM1.45 (see Page 3). There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 5).

Investment case. We like DRBHCOM for: (i) being the second largest player in the local automotive sector, second only to Perodua, with a market share of about 30%, (ii) its strong Proton and Honda franchises, and (iii) its improving banking franchise under Bank Muamalat. However, its outlook has weakened with rival Perodua turning up the heat with aggressive new launches, coupled with earnings drags from certain non-performing units. Maintain MARKET PERFORM.

Risks to our call include: (i) consumers cutting back on discretionary spending (particularly big-ticket items like new cars) amidst high inflation, (ii) persistent disruptions (including chip shortages) in the global automotive supply chain, (iii) a slowdown in capital market activities (Bank Muamalat), and (iv) a global recession hurting the demand for transport and aviation services.

Source: Kenanga Research - 1 Mar 2024