Thursday, October 22

DRB-Hicom’s affected by Covid-19, modest recovery expected

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Analysts expect a strong showing for 2H20 as Proton will be a key beneficiary of the expansionary SST exemption stimulus implemented by the government due to their entire fleet of vehicles being CKD, making their products even more attractively priced.

KUCHING: DRB-Hicom Bhd’s (DRB-Hicom) performance is expected to continue to be weak in the second quarter of the financial year 2020 (2QFY20) before gradually recovering in the second half of FY20 (2HFY20), analysts observed.

AmInvestment Bank Bhd’s research team (AmInvestment) said: “We foresee that losses will widen in 2QFY20. However, we believe that the negatives have already been priced in.

“We expect a strong showing for 2H20 as Proton will be a key beneficiary of the expansionary SST exemption stimulus implemented by the government due to their entire fleet of vehicles being completely knocked down (CKD), making their products even more attractively priced. Proton’s PIES models also provide excellent value propositions.”

It also pointed out that the Proton X50 is expected to be launched in 2H20.

For now, the research team said it has cut DRB-Hicom’s FY20 core net profit forecasts by 57 per cent to account for lower sales volume from Proton, the defence and aviation segments, lower revenue and earnings contribution from the group’s services segment, and lower revenue and earnings contribution from the group’s PAC division amidst the Coronavirus Disease 2019
(Covid-19) outbreak.

Meanwhile, Kenanga Investment Bank Bhd’s research team (Kenanga Research) said it expected lower sales in the 2QFY20 as no sales were recorded in April up to May 12 and it expect cautious spending on high-value discretionary items for the rest of the year.

“The group noted that, the full recovery of automotive sales to pre-Covid-19 level is unlikely and will however respond with promotions and new model launches to recover lost ground,” it added.

Aside from that, it expected the prospects for its other businesses in defence, aerospace, postal and logistics, banking, services and construction segments to remain volatile as these have also been impacted by the uncertainty of a prolonged battle against Covid-19 and it could continue to implement prudent cost optimisation and cashflow management to ensure ability to meet its financial and operational obligations.

On its automotive segment, it noted that the Proton X70 CBU was rolled out on December 12, 2018, and the CKD version (RM4,000 to RM5,000 cheaper than CBU) was rolled out on
Feb 12, 2020, in between the launching of face-lifted existing models’ variants.

For 2H20/21, Proton will launch the Proton X50 (Geely Binyue).

Meanwhile, on DRB-Hicom’s 1QFY20 results, Kenanga Research pointed out that for the first time in four quarters, the group’s performance fell into the red, with core losses of RM113 million compared to core profit of RM188 million for 1Q19 and core profit of RM46 million for 4Q19.

It noted that this was mainly due to lower overall sales (down 21 per cent year-on-year, down 22 per cent quarter-on-quarter) impacted by the Covid-19 pandemic and further worsened by the unfavourable forex movement which caused the group to recognise circa RM72 million  forex losses on translation of payables and borrowings denominated in foreign currencies.

It said, its automotive segment sales (declining 19 per cent y-o-y, down 24 per cent q-o-q) were affected by the closure of business during MCO with Proton sales at 21,728 units (up 40 per cent y-o-y, down 28 per cent q-o-q) and Honda sales at 11,226 units (down 49 per cent y-o-y, down 45 per cent q-o-q).

As for its services segment, the research team noted that DRB-Hicom registered weaker sales (down 24 per cent y-o-y, down 20 per cent q-o-q) especially from Pos Malaysia as its Mail business monthly revenue increased by RM11 million in February 2020 but saw flat growth in March 2020 as the rapid spread of
Covid-19 resulted in a sharp decline in commercial mail volume, while postal segment’s retail and international businesses saw fewer retail transactions recorded in post offices and significantly lower cross-border transhipment tonnage handled in March 2020 as customers remained cautious in trading outside their homes.

The revenue from properties sector (down 19 per cent y-o-y, up 18 per cent q-o-q) was driven by construction-related projects and impacted by the temporary closure of construction sites due to the imposition of the MCO.

All in, Kenanga Research downgraded its call on DRB-Hicom to ‘underperform’ from ‘market perform’ and it cut its FY20 earnings forecast from core profit of RM112 million to core losses of RM191 million, to reflect the weaker-than-expected car sales. Nevertheless, it maintained its FY21 core net profit forecast of RM149 million on new launches, especially the X50.

On the other hand, AmInvestment maintained its ‘buy’ recommendation.