CGS-CIMB Securities Sdn Bhd has upgraded its ‘Add’ recommendation on DRB-Hicom Bhd with a higher target price of RM1.70 as the bank expects stronger sales from financial year 2022 (FY22) to FY23 forecast (FY23F) from the auto segment.

According to its analyst Mohd Shanaz Noor Azam the sales would be driven by economic recovery due from higher vaccination rates and the loosening of Covid-19 restrictions where he had raised the group’s earnings per share between 4% to 13%.

“The stock has also fallen by 27% since its 52-week high on March 21.

“The pullback in share price offers a good opportunity for investors to accumulate the stock and ride the growth in automotive sales volume in FY22F,” he said in a statement.

Mohd Shanaz expects Proton Holdings Bhd to maintain its growth momentum in FY22F due to a healthy orderbook, new sports utility vehicles and Saga facelifts as well as higher contribution from export markets.

On the other hand, he also noted that Honda Malaysia Sdn Bhd is set to increase its FY22F sales volume by 51% year-on-year (YoY) on the back of the City hatchback and HR-V launches.

Pic by Muhd Amin Naharul

The extension of the tax holiday until June 22 would also drive the sales volume growth of these two companies as the bank projects an increase for Proton (15%) and Honda Malaysia (30%).

“The automotive segment remains the key driver for the group on the back of 9.9% YoY revenue growth in FY21, driven by higher contribution from Proton, auto distribution and auto components segments, which grew 9%, 78% and 6%, respectively.

“We attribute the higher revenue to greater sales volume in FY21 amidst a longer lockdown period compared to FY20,” Mohd Shanaz explained.

Proton’s market share grew 1.4% to 21.9% in FY21 which was supported by rising sales volume and decreasing total industry sales volume.

Due to Proton’s higher sales contribution, DRB-Hicom’s fourth quarter 2021 (4Q21) revenue jumped 94.5% quarter-on-quarter (QoQ) to RM4.1 billion

“Proton revenue rose 2.8 times QoQ to RM2.4 bilion in 4Q21 on the back of 2.7 times jump in sales volume to 40.5 thousand units. DRB-Hicom reported RM117 million net profit in 4Q21 (against RM179 million net loss in 3Q20).

“Stripping out the exceptional items, DRB-Hicom posted a higher RM253 million core net profit in 4Q21 (versus RM173 million core net loss in 3Q21),” he added.

The group has exceeded their net loss forecasts of RM182 million when it has recorded a wider core net loss of RM72 million for FY21 against RM69 million in FY20.

Mohd Shanaz observed that the stock would be taken advantage of by the sales volume growth from Proton and Honda Malaysia, losses at Pos Malaysia Bhd, DRB-HICOM Defence Technologies Sdn Bhd’s contract wins and the appreciation of the ringgit against the US dollar.

However, he also warned that the disruption of supply chains, losses at Pos Malaysia, decline in market shares and depreciation of the ringgit would pose a threat to DRB-Hicom’s stocks.