AmResearch retains Buy for DRB-Hicom but lower fair value

KUALA LUMPUR: AmResearch reiterated its Buy on DRB-Hicom, but with its fair value cut by 32% to RM1.96 a share from RM2.88 a share previously based on a 45% discount to its sum-of-parts value of RM3.59 a share.

“Our fair value implies a price-to-book ratio of 0.5 times – at its 10-year historical mean and below the five-year mean of 0.6 times. It is currently trading at 0.3 times FY15 P/B ratio – one standard deviation below the 10-year mean,” it said on Friday.

DRB-Hicom posted a core net loss of RM46.5mil for 1QFY16 on the back of a 21% decline in revenue, due to continuing losses at Proton. No dividend was declared.

The company said the auto industry is facing challenging motor vehicles sales due to various factors, including more st0ringent loan approval policies coupled with weaker consumer sentiment and more intense competition.

DRB-Hicom said the defence AV8 contract and CTRM (aviation component manufacturing) contributed positively as well as its associate Honda Malaysia. However, it was still not enough to offset losses at Proton.

The group sold a total of 49,859 units of vehicles during the quarter – making up 32.4% of total industry volume of 153,878 units. Passenger car sales fell 3.5% to 286,553 units in 1HCY15.

During the same period, Proton accounted for 17.5% market share (50,206 units) vs. 18.4% a year earlier. Proton continues to struggle with price competition, lack f new launches and cost inefficiencies.

Expecting FY16 to be a “very challenging” year, DRBHicom said the group has taken pro-active measures to manage cost and to improve operational efficiencies, as well as more aggressive sales and marketing initiatives.

“We maintain our numbers and Buy, for now. Its RM7.55bil AV8 armoured-vehicle defence project’s earnings contributions are expected to peak in FY17-FY18.

“DRB-Hicom recently roped in Japan’s Suzuki Motor Corp to be Proton’s foreign strategic partner, while it is also rebadging Honda’s model for its soon-to-be introduced Perdana model.