Highlights
- DRB-Hicom (DRB) is an investment holding company with interests in various sectors. It is one of Malaysia’s largest conglomerates and the company has posted a stellar revenue of RM15.5 billion in FY22, the highest revenue in the group’s history.
- Credit quality is fair due to rapid development and enlarging debt size. Credit risks still look manageable in view of its robust fundraising capability.
- Malaysian Automotive Association (MAA) has forecast that the total industry volume (TIV) in 2023 might dip by roughly 10%. However, we deduce that Proton might come out of the gloomy automotive outlook less scathed than the other carmakers.
- With the solid sales track record, more stable chip supplies and Proton’s rapid development in the NEV segment laying as a cornerstone for its future, we are fairly optimistic of Proton’s outlook.
- Interested investors may consider to subscribe to the bond IPO: DRBHMK Apr2033 Corp (MYR) with 10-year tenure and initial guidance of 5.6%. The sukuk is rated as A+ by MARC.
Company background
To recap, DRB-Hicom (DRB) is an investment holding company with interests in automotive, banking, aerospace and defence, postal, services and properties sector. The group is listed on the main board of Bursa Malaysia since September 1992. It is one of Malaysia’s largest conglomerates and the company has posted a stellar revenue of RM15.5 billion in FY22, the highest revenue in the group’s history.
As of 4 April 2023, Tan Sri Syed Mokhtar Albukhary holds a 55.9% indirect interest in DRB-Hicom through Etika Strategi Sdn bhd. This is followed by Employees Provident Fund Board (EPF) with 10.2% and Lembaga Tabung Haji with 3.5%.
Sector breakdown
In automotive sector, DRB holds 50.1% stake in Proton Holdings Berhad, Malaysia’s sole national car brand until the advent of Perodua. It also assembles cars in Malaysia for Honda, Mitsubishi, Isuzu and Volkswagen. Moreover, the group has a longstanding presence in the courier services through Pos Malaysia that has more than 3,500 touchpoints across the country.
In banking segment, the group owns 70% stake in Bank Muamalat Malaysia. The group also plays a key role in the nation’s defence industry by developing and manufacturing armoured and logistic vehicles for the military as well as manufacturing aerostructures for the aviation industry. As for services, DRB offers vehicle inspection services (Puspakom) and cargo handling services. The group also voyaged into the property sector, although revenue contribution from the sector remains insignificant.
DRB Hicom revenue breakdown
The automotive segment remains as the primary revenue driver for DRB-Hicom, contributing to around 71% of total revenue in FY22. This is followed by banking (8%), postal (8%), aerospace and defence (6%), services (5%) and properties (2%).
Chart 1: DRB-Hicom’s revenue breakdown
Posted highest revenue in the group's history
DRB-Hicom recorded RM15.5 billion revenue in FY22, higher by 25% compared to the previous year. It is also the highest revenue in the group’s history as mentioned beforehand. Correspondingly, profit before taxation also returned to the black to RM410 million. This is due to encouraging performances from a handful of its businesses, namely the strong demand from its automotive sector, the higher financing income from its banking sector and a higher delivery of defence and aircraft parts. Operating profit margin is quite thin, standing at 3.7% in FY22 which is still higher than the 0.3% posted in the preceding year.
Chart 2: DRB-Hicom revenue and net profit/(loss) trend
In particular, automotive sector registered higher revenue of RM11.1 billion in FY22 as opposed to RM8.2 billion in previous year. This is mainly because Proton holdings sold more cars in FY22 (141,432 cars) than FY21 (114,708 cars). In fact, the vehicles sold in FY22 is Proton’s highest closing figure recorded since 2013.
Increasing gearing ratio, but overall looking credit ratios are still manageable
In terms of gearing ratio, both debt to equity ratio and net debt to equity ratio is on an uptrend which is in correlation with the increasing capital expenditure (CAPEX). The outstanding debt has inevitably moved up along with its rapid development. While the DE ratio in FY22 is slightly lower by 6 basis points from the previous year, we opine that the DE ratio might spike in the future considering that DRB will be issuing new sukuk shortly after. Net debt to EBITDA has declined from the high of 4.56 in 2021 to 3.08 in 2022, a drop of circa 32% y-o-y.
Apart from that, EBITDA interest coverage ratio has recovered back to the 2019 level while still fall short of 2020 level. Furthermore, cash coverage ratio is on a descending manner as DRB moderately reduced its cash position over the years.
Looking into its liquidity ratio, current ratio has increased to 1.33 times in FY22 (FY21: 1.18 times) due to a reduction in short term borrowings. Correspondingly, quick ratio also increased from the low of 0.58 times in 2020 to 0.68 times in 2022.
On the whole, DRB credit quality is fair due to rapid development and enlarging debt size. Credit risks still look manageable in view of its robust fundraising capability.
Table 1: DRB-Hicom credit ratios
Improving cash flow
As DRB-Hicom has a banking arm (Bank Muamalat), its cash flow from operating activities (CFO) is heavily influenced by the movements in loan financing and customer deposits. This would cloak us from seeing the genuine cash flow generated from DRB businesses. Hence, we exclude working capital changes from the computation to have a better picture of the cash flow generated without the aforesaid movements interfering.
With that said, we can see that CFO (excluding working capital changes) is higher in FY22. This signifies the improvement in DRB operation from the previous year. Correspondingly, free cash flow (excluding working capital changes) has also increased to RM692.3 million in FY22, up by 22% y-o-y.
Apart from that, excluding FY21, capital expenditure has been pretty stable and is on a gradual uptrend. This we opine is essential to maintain the competitiveness of Proton Holdings. The recent announcement of DRB-Hicom and Zhejiang Geely Holding signing an agreement to develop automotive high-tech valley(AHTV) in Tanjong Malim, Perak as Malaysia’s next-generation vehicle hub further reinforces the belief that DRB-Hicom isn’t looking to halt its CAPEX investment anytime soon.
Table 2: DRB-Hicom cash flow structure
Bright outlook ahead for Proton
In 2017, Proton underwent a turnaround with the entry of ZheJiang Geely Holding as a strategic partner through a 49.9% stake. Since then, Proton has managed to achieve a constant growth in vehicle sales even during turbulent times like the shortage of chip supplies and the challenging market situation during covid time. While the vehicle sales tax exemption offered (June 2020 – June 2022) by the Malaysia government definitely helped Proton to weather through the difficult times, the stellar vehicle sales recorded is in no small part owing to the economical pricing as well as the superior quality of Proton vehicles.
This is corroborated by the fact that three of Proton automotive models ended 2022 as segment leaders. The Proton X50 continues to be the best-selling SUV in Malaysia while Proton X70 retained its crown as the highest volume C-segment SUV for the fourth consecutive year. The third leading model is the Proton Exora as the highest volume C-segment MPV.
In addition, Proton also retained its position as the second largest player in Malaysia automotive sector in terms of market share. Moreover, Proton has recently unveiled the Proton X90, a mild-hybrid electric vehicle that marks its entry into the New Energy Vehicle(NEV) market. With the solid sales track record, more stable chip supplies and Proton’s rapid development in the NEV segment laying as a cornerstone for its future, we are fairly optimistic of Proton’s outlook.
Chart 3: Vehicle sales (units) in Malaysia
Expect Proton to be less scathed than the other carmakers in the gloomy automotive outlook
Due to the challenging economic environment, Malaysian Automotive Association (MAA) has forecasted 2023 total industry volume (TIV) to dip roughly 10% before commencing a gradual recovery onwards. However, we deduce that Proton might come out of the gloomy automotive outlook less scathed than the other carmakers.
Firstly, Proton cars are known to be utilitarian and affordable. Hence, during tough times, people who wishes to purchase a car but have restrain on their budget will probably deliberate Proton as one of the viable choices. For illustration, Proton has 3 models that is priced below RM50,000, namely Proton Saga, Proton Persona and Proton Iriz.
Secondly, the launching of Proton X90 in 2023 is bound to receive attention and hype from Malaysia citizens. For example, the Proton X50 was off to a flying start during launch where it received over 20,000 bookings in its first two weeks. Another example is Proton X70 whose also received much love from Malaysians where it garnered over 10,000 bookings within two months time. The imminent introduction of Proton X90 should allow Proton to sufficiently replenish its orderbook to at least cushion through 2023.
Chart 4: Forecast of total industry volume (TIV)
Debt maturity analysis
As at 31 December 2022, DRB account book consists of borrowing totaled to RM749 million in short term loan and RM6.1 billion in long term loan. With the group having cash and cash equivalents of RM2.2 billion in FY22, this is sufficient to cover its short-term borrowings.
As for long term loan, DRB has outstanding amount under DRB sukuk programmes standing at RM2.3 billion and RM350 million (perpetual sukuk) respectively as at September 2022. Moreover, the group has unutilised credit facilities of approximately RM7.3 billion as at June 2022 that exclude the rated programme borrowing facilities. Hence, DRB would have adequate flexibility to meet its short term and long term borrowings as long as it is able to refinance.
With that said, it is worth looking at and assess the group’s refinancing risk. In general, refinancing terms are dependent on the issuer’s operating condition, profitability and industry prospect. In terms of operating condition, DRB has welcomed a strategic partner ZheJiang Geely Holding in 2017 and since then the group has experienced a drastic turnaround and revived its fortune. Revenue has been kept stably above RM10 billion for years. The group has also just recorded the highest revenue in the group’s history.
While the automotive industry prospect remains gloomy in the short term, we opine that the medium to long term outlook for the industry remains fairly positive. All things considered, we deem that refinancing risk of DRB is low.
Table 3: DRB-Hicom outstanding borrowings as at 31 December 2022
|
|
Short-term borrowings |
Long-term borrowings |
Total (RM mil) |
|
Borrowings |
749 |
6,092 |
6,841 |
|
Source: DRB Hicom, iFAST Compilations as of 5 April 2023 |
|||
Bond investment
We believe DRB bond is attractive given Proton’s bright outlook and the group’s decent credit profile. Therefore, interested investors may consider to subscribe to DRB new bond IPO: DRBHMK Apr2033 Corp (MYR) which offers an initial guidance of around 5.6% with a 10-year tenure.
For context, the discussed sukuk is rated as A+ by MARC. Furthermore, the increase in tenure is also well compensated with higher yield as seen in the table below, which makes us favour the bond. Do note that the closing date is on 10 April 2023, which is just 3 days away.
Table 4: DRB-Hicom bond investment
Corporate risk
Malaysia is on the cusp of a recession which would cause consumers to pull back on their spending, especially on big ticket item such as vehicle. Therefore, the desire to purchase new vehicles might wane resulting in a stagnant or even a drop in DRB-Hicom earnings.
Investors should be alerted that DRBHMK Apr2033 Corp (MYR) is a 10-year bond that subject the bond to a higher duration risk. That means the bond will be more sensitive to interest rate changes.
As noted earlier, DRB-Hicom gearing ratio is in an ascending manner and the gearing ratio could go much higher with the new sukuk issuance. While this is customary for a company that is going through rapid development, its gearing ratio will need to be monitored closely to ensure that the group isn’t taking on excessive financial risk.
Conclusion
DRB-Hicom (DRB) is an investment holding company with interests in various sectors. It is one of Malaysia’s largest conglomerates and the company has posted a stellar revenue of RM15.5 billion in FY22, the highest revenue in the group’s history. Credit wise, DRB credit quality is fair due to rapid development and enlarging debt size. Credit risks still look manageable in view of its robust fundraising capability. Investors may consider to subscribe to the bond IPO: DRBHMK Apr2033 Corp (MYR) with 10-year tenure and initial guidance of 5.6%.
Declaration: For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) does not hold a position in DRBHMK Apr2033 Corp (MYR) and the analyst who produced this report holds a NIL position in the abovementioned securities.
