Credit Update: DRB-HICOM Berhad's perpetual sukuk Musharakah programme

Source: DRB-HICOM; * Unaudited

For the full fiscal year 2021, DRB-HICOM posted RM12.4 billion in revenue, down -5.9% y-o-y from RM13.2 billion in 2020. The decline in revenue was largely due to weaker performance for all business segments mainly between 2Q2021 and 3Q2021 due to pandemic-induced closures.

However, in 1H022, the Group’s revenue grew 8.0% y-o-y to RM6.6 billion, mainly driven by automotive demand. As a result, the conglomerate reverses RM243.2 million pre-tax loss last year, to RM233.2 million in end-June 2022. 

For DRB-HICOM’s automotive sector, revenue was particularly high in June 2022 as car buyers take advantage of the sales tax exemption offered by the government, before its expiry on June 30, 2022.

Market outlook – Automotive industry

Exhibit 4: M-o-m total industry volume (TIV) from Jan 2017 to Jun 2022

Source: MAA

Exhibit 5: Phases of lockdown in Malaysia (2020-2021)

Phase	Period
MCO	18 March 2020 – 3 May 2020
Conditional MCO	4 May 2020 – 9 June 2020
Recovery MCO	10 June 2020 – 31 March 2021
MCO by states*	13 January 2021 – 31 May 2021
MCO	1 June 2021 – 28 June 2021
National Recovery Plan	15 June 2021 – 31 December 2021

* Depending on the COVID-19 status in each state

Business activities in the automotive sector was highly influenced by the authority responses to contain the virus outbreak. As seen in Exhibit 2 and Exhibit 3, there was a strong correlation between total car sales against different phases of mobility state throughout 2020 and 2021 (Exhibit 4 and 5).

Overall, the TIV volume in 1H2022 was higher by 33% y-o-y at 331,386 vehicles, compared to the previous corresponding period of (1H2021: 249,178 vehicles). Despite the pent-up demand in the automotive industry in view of the reopening of economy in early-2022, the strong y-o-y growth is also partially attributed to low base effect in the previous year.

Despite the expiry of sales tax exemption on June 30, 2022, authorities have extended the registration timeline for buyers with confirmed bookings up to March 31, 2023. Thus, allowing car makers to fulfil potential backlogged orders as well as allowing consumers to enjoy lower priced cars.

In line with the gradual reopening of economy, Malaysia registered a stronger growth of 8.9% in the 2Q2022 (1Q 2022: 5.0%). Under the consistent expansionary policy under Budget 2022 and encouraging labour market conditions, we believe that the automotive industry would continue to benefit from the aforementioned vehicle registration dateline. According to MAA, a continued effort to fulfil backlogged orders, promotional campaigns, new model launches by automotive players are key to boost sales and maintain market shares.

Market position

Exhibit 6: Market position by major makers

Source: MAA

Proton’s market share stands at 17.3% as of end-June 2022. Based on Hong Leong Investment Bank Research Analysis report, Proton aims on fulfilling its backlogged orders and resolving supply chain issues during the remaining years of 2022 and rescheduled new launcher in 2023.

Additionally, the carmaker had obtained enough microchip supplies to its meet current demand.  Among new models slated to be launched next year include the updated Saga as well as X90. In terms of models, the Saga was the brand’s most popular offering, followed by the X50, X70, Persona, Iriz and Exora.

Capital Structure

Exhibit 7: Selected capital structure indicators

FYE December 31	1H2022*	2021	2020
Debt-to-OPBITDA (x)	8.3	5.2	3.9
DE ratio (x)	0.97	0.88	0.75
Net DE (x)	0.63	0.58	0.5
Total borrowings	8,850.3	8,039.1	7,359.4
Shareholders' funds	9,168.1	9,097.8	9,857.1
Cash and cash balances	3,107.0	2,804.5	2,406.1

Source: DRB-HICOM; * Unaudited

On June 30, 2022, its automotive subsidiary issued RM700 million under its sukuk Wakalah programme. The proceeds from this will be utilised to finance the company’s future expansion plans as well as working capital requirements. Correspondingly, total borrowings stood at RM8.9 billion in 1H2022 (2021: RM8.0 billion). This translates to a DE and net DE of 0.97x and 0.63x in end-June 2022. We note on the uptrend in both DE and net DE ratios in the recent years, which coincides with the plant upgrading and construction phase.

Debt maturity profile

Exhibit 8: Group debt maturity profile as at end-June 2022 

FYE December 31	Short term	Long term	Sub-total
Overdrafts	2.7	-	2.7
Trade facilities	1,742.3	-	1,742.3
Term loans	1,097.3	5,938.4	7,035.7
Hire purchase	28.5	41.0	69.6
Total	2,870.8	5,979.5	8,850.3

Source: DRB-HICOM

The group’s short term repayment obligations primarily consist of maturing long-term loans and trade facilities. Excluding the trade facilities, short-term debt obligations would stand at RM1.1 billion (includes maturing sukuk of RM250.0 million in 2022). These short-term commitments will be sufficiently met via unencumbered cash balance of RM3.1 billion.

As of end-August 2022, total outstanding amount under the sukuk IMTN stood at RM2.3 billion, from a total facility limit of up to RM3.5 billion. The available credit line under this facility may provide flexibility to the cash flow to meet its maturing long-term loans.

Salient terms in under the perpetual sukuk

Investors should note on the non-cumulative deferred coupon payment under the transaction. Triggered a non-cumulative deferral coupon payment means investor will not receive any coupon payment in that particular period. The deferral of coupon payment shall be effective subject to requirements outlined under the related documents which can be found here.

RECOMMENDATION:

The automotive segment remains as key contributor for the Group’s revenue. Over the near term, we opine that its core business will be supported by economic recovery and easing of supply chain disruptions. Despite the expiry of sales tax holiday for its automotive sector on June 30, 2022, the extended period up to March 31, 2023 for new vehicles is viewed positively by automotive players, allowing them to fulfil potential backlogged orders.

Moderating the potential upsides are the increasing interest rate environment, ongoing geopolitical tension. Compounding the issue further is the global chip shortage which impact local and global market concurrently. Although the encouraging economic indicators are expected to improve business sentiment, we would closely monitor the Group’s financial performance for the remaining months of 2022, and/or any potential development that could weaken its leverage position.

DRBHMK Perpetual Corp (MYR) has an indicative yield to worst of 6.75% with about 5 years to the next call date in July 2027. The perp provides the highest yields among comparable perps with similar years to their call date. If not called, the DRBHMK Perpetual Corp (MYR) will reset at the prevailing MGS 5Y plus the initial spread of 410 bps and the step-up margin of 100 bps.

For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) and the analyst who produced this report hold a NIL position in the abovementioned securities.

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