DRBHCOM's 9MFY24 core net profit met our expectation despite plunging 55% YoY, largely due to wider sequential quarter losses at its postal segment, lower profit recognition under banking segment, and higher tax. We expect a stronger quarter ahead on higher automotive sales volume driven by year-end promotion and expected reversal of mark-to-market loss on derivatives under banking segment. We maintain our forecasts, TP of RM1.30 and OUTPERFORM call.

DRBHCOM's 9MFY24 core net profit (excluding one-offs at RM38m) coming in at only 45% and 43% of our full-year forecast and the full- year consensus estimate, respectively. However, we deemed it within our expectation, anticipating a stronger upcoming 4Q results arising from (i) higher automotive sales volume driven by the year-end promotion and (ii) expected reversal of mark-to-market loss on derivatives under banking segment in 4Q (on which if not recognised in 3Q, core net profit would have been at 78% of our full-year forecast).

YoY, its 9MFY24 revenue was flattish YoY dragged by: (i) weaker automotive sales (-3%) due to the lower sales volume from Proton at 110,215 units (-4%), Mitsubishi at 11,962 units (-28%), and Isuzu at 9,740 units (-23%) from intense competition in the mid-market segments, (ii) postal service (-5%) which continued to be affected by slowdown in online shopping and lower demand from major e- commerce players, and (iii) properties and others (-22%). This offset: (i) higher financing income from Bank Muamalat (+26%), (ii) stronger aviation services (+13%) in line with the rising number of flights by Pos Aviation, and (iii) stronger aerospace & defence (+24%) due to higher product deliveries of single-aisle and certain aircraft parts. Its share of associates' profit was weaker (-8%) on higher discounting to boost the sales volume by 34%-owned Honda Malaysia (+10% to 59,396 units).

However, its core net profit plunged 55% largely due to wider losses at postal segment, mark-to-market loss on derivatives at RM80.3m under banking segment in 3Q and a higher effective tax rate.

QoQ, its 3QFY24 revenue soared 10% driven by: (i) automotive sales (+13%) on longer production days and attractive year-end promotion, (ii) banking (+6%), and (iii) aviation services (+16%), which more than offset: (i) postal service (-1%), (ii) properties and others (-2%), and (iii) aerospace and defence (-8%). However, there was mark-to-market loss on derivatives of RM80.3m under banking segment. All in, it recorded core net profit of RM38m vs. core net loss of RM15m in 2QFY24.

Forecasts. Maintained.

Valuations. We also maintain our Sum-of-Parts (SoP)-derived TP of RM1.30 (see Page 2). 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. The share price has declined 28% YTD, which we believe has been factored in with DRBHCOM now trading at 8.5x based on our FY24F EPS, which is cheap versus historical average of 10x and auto sector's average forward PER of 11x. Maintain OUTPERFORM.

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 - 22 Nov 2024