Hello, haven’t been writing so much these days as work gets busier and busier. These days discussions were happening between friends and I whether we should buy DRBHICOM (1619), one of Malaysia’s largest conglomerate as its prospects began to look attractive. So let’s check shall we?
With A Price-to-Earning (P/E) of 15.4 as of 12th Feb 2020, DRBH’s valuation is considered slightly expensive as compared to its automotive peer, according to Figure below.
It should be noted that automotive only takes up 60% of total DRBH’s revenue, as it has other contributions from Services sector such as POS Malaysia, PUSPAKOM, BANK MUALAMAT and its own university.
Its ROE stands at merely 2.34%, indicating that shareholder’s return on equity is only returned RM2.34 for every RM100 equity invested. Its current ratio stands at 0.54, indicating that its current debt is around two times higher than its current asset. Revenue year-on-year has grown 15% in 2019 contributed mainly from higher sales in its automotive sector. POS MALAYSIA remains a pain in the neck for DRBH as it recorded lower revenue growth from its mail sector.
Before I start commenting whether DRBH’s current valuation is expensive or fair, I would like to dig into what DRBHICOM’s revenue were constituted by. Its mainly from THREE sectors, AUTOMOTIVE, SERVICES and PROPERTIES.
I will write only AUTOMOTIVE in PART 1 of this, and SERVICES & PROPERTIES in the next part.
What DRBHICOM Do
DRBHICOM primarily engages in which includes Automotive, Services and Property in Malaysia as shown in the corporate group structure in Figure 1.
Figure 1: DRBHICOM’s Group Corporate Structure (Source: Annual Report 2019)
From DRBH’s report, Automotive takes up approximately 59% of DRBHH’s total sales, followed by Services (37%) and Property (4%). Hence, I will focus more on Automotive and Services which takes up more than 96% of DRBH’s total sales.
AUTOMOTIVE
In the automotive sector, DRBH owns 100% of DRBHICOM- Defense, 81% of Modenas, 48.42% in Isuzu Malaysia, 34% in Honda Malaysia Sdn Bhd, and 100% in DRB-HICOM Auto Solutions Sdn Bhd.
In May 2017, DRBH sold 49.9% stake of Proton Holdings to Geely which cite “to explore joint synergies in areas such as R&D, manufacturing and market presence”. This move allow Proton to restructure its management, as a hope to turn Proton into a profit-making company as they suffer a RM500 million lost in 2016 and requested an additional R&D fees of RM1.1 billion in 2017. With Geely coming in, Li Chen Rong was appointed as the group’s CEO and transformation within the group starts.
Revenue in automotive sector as of May 2017 was RM8.08b, slipped by 14% y-o-y from RM9.4 billion in 2016. This is the total vehicles sales in Jan-18, where Perodua is leading, followed by Honda and then Proton.
Figure 2: Total Sales by Brand in Jan18
In April 2018, it was the first time Proton’s sales became the second, outperforming Honda in terms of total vehicle sales, do note that at this time X70 has yet to be launched. X70’s first premier was October 2018, with its total order booking coming at 10,000 units.
Figure 2: Total Sales by Brand in April18
X70 was subsequently launched at Jan 19, and Proton started leading second in total vehicle sales starting April 19, as seen in the graph below.
Figure 3: Total Vehicle Sales by brand from Dec’17 to Dec’19.
Sept19
|
Sept18
| |
Revenue
|
2,422,465
|
1.924,534
|
Year
|
June19
|
June18
|
Revenue
|
2,234,473
|
1,403,604
|
Year
|
March19
|
March 18
|
Revenue
|
2,077,402
|
1,590,925
|
Contribution from the automotive sector has been increasing around 8% every quarter since Jan19 to September 19. Looking at Figure 3, Proton has sold more units than Jan’19 to Sept’19, so total revenue contributed from Automotive for Sept19 to Dec’19 should be expecting a 10% increment.
To conclude, AUTOMOTIVE sector which contributes about 60% of total DRBH’s sales should expect a positive increment following the aggressive cost cut and innovative products launch boosted by a better TIV (Total Industrial Volume) from Sept’19 to Dec’19.
Wait, better sales and how about cost and expenses? At its first year of its joint-venture, Geely dropped many of proton’s old models, and launched six new ones within eight months, including the X70 SUV which is based on Geely’s Boyue. Proton saved RM250 million ringgit in cost in 2018, cut its warehouses to 4 from 16 and sold 1,000 of its 1,500 company cars. It also stopped all department’s newspaper subscription apart from CEO’s deputy. This has shown the aggressiveness and will of Li to turn Proton black, which it does for the FIRST time in nine years last year.
To validate it from quarter report, lets look at the interim report of March 2017 and March 2019 automotive segment.
March 2019 Interim Report
March 2017 Interim Report
It should be seen that although a lower total sales was recorded in 2019, segment loss was only at RM76 million, as compared to sales in March 2017 where although it has higher revenue, it recorded a loss of RM955 million. This shows the effectiveness of cost cutting by the new Proton's CEO.
DRBH announced Recurrent Related Party Transaction (RPPT) announcement today which announces a higher actual value of RPPT than estimated value.
Figure: DRBHICOM's RPPT Announcement
In Proton’s car manufacturing, Teck See Plastic provide automotive plastic components to DRBH and the actual amount of RPPT is lower than estimated value. This could be due to lower raw material price (polypropylene) which is used to make automotive plastics. However, DRBHICOM purchased more raw materials from CCSB following award of a contract to supply new bumper model. This indicates that DRBHICOM’s production has increased during the time Sept’19 to 31st Jan 2020.
2020 Prospects
With the upcoming X50 which will be based on Geely’s Binyue/Coolray set to be launched this year 2020. X70 will also receive a facelift on 2020, which will further improve Proton’s momentum to beat Perodua in terms of total vehicle sales.
Proton’s 2020 X50 (Image from PaulTan.org)
Malaysian Automotive Association (MAA) projected the TIV to increase only marginally by 0.5% from 604,287 in 2019 to 607,000 units in 2020. With the Wuhan virus impact coming in, the increment could be lower, or even decreased. National Automotive Policy 2020 (NAP) which is set to be announced on late February or early March by Prime Minister Dr.Mahathir is expected to include policies on next generation vehicles, mobility and energy efficient vehicles incentives. This hopes to be a life-saving straw for the automotive industry ahead of the headwinds.
Although the impact of Wuhan virus outbreak is still unquantified, it should affect customers’ sentiments to purchase cars as Malaysia’s economy growth is set to be impacted a lot as China stands as Malaysia’s largest exporter. Tourisms where China’s tourist takes up 19% of total 2019 tourist volume will be slowed down and Malaysia’s TIV for the first half 2020 is expected to slow down.
All these indications is a GREEN LIGHT that DRBHICOM SHOULD report a better Dec’19 quarter in the AUTOMOTIVE sector ahead IF there’s no other sudden impairments/ one-off/ losses.
Will soon write Services & Properties together with overall valuation of DRBHICOM in my opinion. If you find anything interesting, please do leave a comment below to discuss! Stay tune!
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