Highlights:
- DRB-Hicom achieved a historical high revenue of RM 15.9 billion (FY2022: RM 15.5 billion) and profit before taxation increased by 9% YoY, from RM 0.41 billion in FY2022 to RM 0.45 billion in FY 2023.
- Automotive and banking sectors remain as the key revenue contributor, contributing 72% and 11% revenue respectively.
- DRB-Hicom’s gearing ratio remained at a high level of 0.71x. Cash and cash equivalents were RM 2 billion, sufficient to cover its short-term borrowings of RM 1.5 million. Considering the group’s rapid developments, the overall credit profile remains decent despite high level of long-term borrowings.
- The potential risks: Increasing focus on EVs in Malaysia may poses a threat to fuel car and stiff competitions in the courier services industry.
- Investors may consider DRBHMK 4.850% 04Aug2028 Corp (MYR), given its decent credit quality.
Introduction
DRB-Hicom is an investment holding company established in 1980 through a merger between the diversified conglomerate DRB Group and the Heavy Industries Corporation of Malaysia Berhad (HICOM). The group operates across six business sectors through its subsidiaries, including: i) Automotive, ii) Aerospace & Defence, iii) Banking, iv) Postal, v) Services, and vi) Properties.
Since its listing on Bursa Malaysia in 1992, DRB-HICOM has grown to become one of Malaysia's largest and most varied conglomerates, boasting over 80 operating companies and approximately 46,000 employees. As of 23 April 2024, the group's largest shareholder is Tan Sri Syed Mokhtar, who holds a 55.92% stake through his private entity, Etika Strategies Sdn Bhd. The group's market capitalization currently stands at RM 1.933 billion.
Previous update on DRB-Hicom: DRB-Hicom to ride on Proton promising outlook.
Operating sectors breakdown
Automotive sector: DRB-Hicom is holding 50.1% stake in Proton Holdings Berhad, Malaysia’s national car brand, primarily involved in manufacturing and assembly of Proton cars. Other than this, they also engage in distribution of Honda, Mitsubishi, Isuzu cars and etc.
Banking Sector: DRB-Hicom owns 70% stake in Bank Muamalat Malaysia.
Postal Sector: Owns 53.5% stake in Pos Malaysia.
Aerospace & Defence: Manufacturing and sale of military vehicles, manufacturing aerostructures for aviation industry.
Services: Vehicle
inspections services, airport ground handling business, higher education and
vocational training institution and others (such as PUSPAKOM, DRB-Hicom
University and POS Aviation).
Properties: Property concession, holding and development.
DRB-Hicom continued to achieve historically high revenues in FY2023.
In FY2023, the group achieved a historical high revenue of RM 15.9 billion (FY2022: RM 15.5 billion) and profit before taxation increased by 9% YoY, from RM 0.41 billion in FY2022 to RM 0.45 billion in FY 2023. The outstanding performance was mainly driven by higher demand from automotive sector and higher financing income from the banking sectors. However, it was partially offset by lower revenue contributions from aerospace & defend, postal, services and properties sectors. The group’s operating profit margin remains thin, but it has improved by 0.3%, from 3.7% to 4.0%.
Chart 1: Revenue, Profit before taxation and operating profit margin
Automotive and Banking sectors remain as key revenue contributor; while other sectors posted slightly lower revenue compared to previous year.
In FY2023, automotive and banking sectors remain as the key revenue contributor, contributing 72% and 11% revenue respectively (Chart 3).
The automotive sector saw an increase in revenue, rising from RM 11.1 billion in FY2022 to RM 11.3 billion. This growth was primarily driven by improved performance in automotive distribution and manufacturing and engineering, underpinned by higher sales volumes of PROTON cars (Chart 4). PROTON achieved a historical high sales volume in FY2023, where PROTON sold a total 154,611 units of vehicles in FY2023 compared to 141,432 units in FY2022.
The banking sector similarly reported higher revenue of RM 1.7 billion compared to RM 1.3 billion in FY2022, marking a notable increase of 35%. This growth was attributed to higher financing income driven by increase in financing volume and growing customer base.
However, the revenue was partially offset by lower revenue recognised from aerospace and defence sector (due to lower delivery of products), postal sector (drop in courier business due to the intense competition in the industry) and properties sector (lower revenue from projects).
Although the abovementioned sectors reported slightly decline in revenue contributions, we don’t see this as significant concern, as they constitute only a small portion of the total revenue of the group. Overall, the group still managed to achieve higher revenue compared to corresponding period.
Chart 2: Revenue contribution from each segment – FY2021 vs FY2022 vs FY2023 (RM billion)
Chart 3: Revenue breakdown in FY2023
Chart 4: PROTON’s 5 Years Sales Performance (units)
Overall credit profile remains decent despite high level of long-term borrowings.
In FY2023, DRB-Hicom’s gearing ratio remained at a high level of 0.71x, hovering between 0.69x – 0.92x over the past 5 years. The long-term borrowings stood at RM 6 billion, this was mainly used to support its working capital and CAPEX needs. We anticipate that the DE ratio will stay elevated as the group may take on additional debt to fund the growing CAPEX, which aligns with the group's rapid expansion.
In terms of liquidity, despite the current ratio declined slightly to 0.46x as a result of increased deposits from customers, DRB-Hicom’s cash and cash equivalents were RM 2 billion as of end-December 2023, it was sufficient to cover its short-term borrowings of RM 1.5 million.
To conclude, we view that DRB-Hicom’s debt level will be pared down once the expansion plan in Perak is done. At this juncture, the debt level is still manageable and the overall credit profile is decent considering its rapid developments.
Table 1: Selected Indicators (RM billion, unless otherwise stated)
|
|
2019 |
2020 |
2021 |
2022 |
2023 (Unaudited) |
|
Cash and cash equivalents |
2.5 |
2.4 |
2.8 |
2.2 |
2.0 |
|
Short-term borrowings (includes lease liabilities) |
2.0 |
2.9 |
2.6 |
1.9 |
1.5 |
|
Long-term borrowings (includes lease liabilities) |
4.7 |
4.9 |
5.7 |
6.3 |
6.0 |
|
TOTAL EQUITY |
9.8 |
9.9 |
9.1 |
9.7 |
10.6 |
|
Debt to equity ratio (x) |
0.69 |
0.79 |
0.92 |
0.85 |
0.71 |
|
Current ratio (x) |
0.60 |
0.56 |
0.51 |
0.49 |
0.46 |
|
Cash to short term debt (x) |
1.23 |
0.82 |
1.06 |
1.16 |
1.32 |
|
Cash coverage ratio (x) |
7.32 |
4.92 |
5.77 |
4.28 |
3.85 |
|
Source: Company's Reports, iFAST Compilations as of 31 Dec 2023 |
|||||
Outlook remains bright
We opine that Proton, known to be affordable car maker, will continue to ride on the momentum. This is because the awareness among the M40 household income group about the implementation of fuel subsidy rationalization plan would have an impact on the cost of living, potentially dampen demand for mid-range car models (such as Toyota Vios, Mazda 2, Cherry Omoda 5 and etc). Consequently, M40 households may opt for smaller cars to reduce the fuel expenses. Affordable car models like the Proton Saga, Persona, and Iriz are expected to be preferred options for budget-conscious consumers seeking affordability.
Moreover, the Proton X-series, including Proton X50 and Proton X70 are among the popular choices in Malaysia. Nevertheless, the sales volume of the latest SUV Model – Proton X90 seems lacklustre, the units sold as of Dec 2023 was only 4,285 units. We believe that the primary factor is the slightly higher selling price, which may lead people to choose better alternatives within the same price range. Thanks to X50 and X70, the Proton X-series lineup has collectively surpassed a significant milestone of over 200,000 units on the road. The latest model launched in Nov 2023 (Proton S70) – a C-segment sedan, which has also received overwhelming demand. In Feb 2024, the sales up by 60.5% compared to Jan 2024, with over 8,000 orders in Feb 2024 since its launch date. We believe these models will continue to drive the sales figures in 2024.
Table 2: No.of units sold of Proton X Series (as of Dec 2023)
|
Car Models |
Launch Date |
Units sold |
|
Proton X50 |
Oct-20 |
102,325 |
|
Proton X70 |
Dec-18 |
95,100 |
|
Proton X90 |
May-23 |
4,285 |
|
Source: Company's Reports, iFAST compilations as of 31 Dec 2023. |
||
Additionally, the Malaysian economy is expected to grow by 4%-5% in 2024. The stability in the labour market will bolster consumer spending, fostering the financing activities which is benefiting the banking sector. However, the depreciation of MYR against major currencies might create challenges, such as higher cost of living, prompting individuals to be more cautious in taking up financing.
To conclude, we hold a positive outlook on DRB-Hicom's future prospects, anticipating sustainable growth in both the automotive and banking sectors.
Risks
With the increasing focus on EVs in the Malaysian market, competition in the automotive industry is set to intensify. The incentives for EVs introduced in Budget 2024, such as tax rebates, are encouraging individuals to opt for EVs over traditional fuel cars. On top of this, EV technology advancements may outpace traditional fuel car technology, making EVs more attractive in terms of performance, cost, and convenience. Furthermore, several Chinese brands are offering attractive pricing package in order to capture market share penetration. Such actions could potentially lead to a decline in market share for traditional petrol cars as consumers favor EVs.
Secondly, stiff competitions in courier services industry may potentially weigh down on POS Malaysia’s profitability. This is primarily driven by many e-commerce companies opting for in-house delivery services, reducing their reliance on external courier service providers like POS Malaysia. Additionally, international e-commerce players persist in undercutting margins to increase their market share in the courier industry.
Our recommendation
As one of the largest conglomerates holding interests in renowned companies like Proton, Pos Malaysia, DRB-Hicom has consistently recorded strong revenue over the years and the group achieved a record high revenue in FY2023. The outstanding performance has bolstered investors’ confidence in the company. Also, as we can see there are increasing numbers of Proton and Honda cars on the road, indicating positive sign for the business.
Given the bright future outlook and decent credit profile, investors may look for its existing issuance, which is also available on Bond Express.
Table 3: Bond recommendation
|
Bond |
Yield to Maturity |
Years to Maturity |
|
approximate 4.7% area |
4 Years 4 Months |
|
|
Source: BSM, iFAST compilations as of 25 April 2024. |
||
Take note:
1) Rated A+ by MARC
2) Paying coupon semi-annually
3) Available on Bond Express, minimum investment amount: RM 5,000
For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) holds DRBHMK 4.850% 04Aug2028 Corp (MYR) and the analyst who produced this report holds a NIL position in the abovementioned securities.
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