DRBHCOM’s 1QFY24 results met expectations. Its 1QFY24 core net profit plunged 22% YoY as improved operating results were negated by a higher tax. We are cautious on its outlook as rival Perodua is turning up the heat with aggressive new launches. We maintain our forecasts, TP of RM1.40 and MARKET PERFORM call.

DRBHCOM’s 1QFY24 core net profit (excluding one-offs at RM7m) met expectations at 28% and 25% of our full-year forecast and the full-year consensus estimate, respectively.

YoY, its 1QFY24 revenue rose 6% YoY driven by: (i) automotive sales (+1%) on higher-priced new models launches led by Proton at 38,472 units (-4%), Mitsubishi at 4,483 units (-27%), and Isuzu at 3,341 units (- 17%), (ii) higher financing income from Bank Muamalat (+35%), (iii) postal service (+5%) buoyed by some one-time postal services rendered to the government, (iv) aviation services (+6%) in line with the rising number of flights by Pos Aviation, (v) aerospace & defence (+11%) due to higher product deliveries of single-aisle and certain aircraft parts, and (vi) properties and others (+63%). Its share of associates’ profit eased (-10%) on higher discounting to boost the sales volume by 34%-owned Honda Malaysia (+23% to 21,568 units).

However, its core net profit plunged 22% largely due to a higher effective tax rate of 29% vs 21% in 1QFY23.

QoQ, its 1QFY24 revenue rose 15% on a seasonally stronger quarter driven by Proton (+6%), Banking (+12%) and Postal (+11%). However, its core net profit almost tripled as losses from the postal and service segments narrowed, coupled with improved associates’ profit (+71%) despite lower sales volume from 34%-owned Honda Malaysia (-17%).

Forecasts. Maintained.

Valuations. We also maintain our Sum-of-Parts (SoP)-derived TP of RM1.40 (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 - 24 May 2024