Rating action            

MARC Ratings has revised its ratings outlook on DRB-HICOM Berhad’s Sukuk Programme of up to RM3.5 billion and Perpetual Sukuk Musharakah Programme of up to RM2.0 billion to positive from stable. Meanwhile, the ratings have been affirmed at A+_IS and A-_IS with the two-notch rating differential between the programmes reflecting the subordination of the perpetual sukuk to the senior sukuk. The outstanding under the programmes stood at RM2.3 billion and RM550.0 million as of October 26, 2023.

Rationale       

The outlook revision incorporates the improvement in the group’s credit profile, stemming largely from the strong performance of its automotive segment. In particular, its key subsidiary PROTON Holdings Berhad (PROTON) has continued to record strong sales, increasing its domestic market share to 20.8% of total industry volume (TIV) in 1H2023 from 12.3% in 2017 when the partnership between DRB-HICOM and China-based Zhejiang Geely Holding Group Co., Ltd (Geely) commenced. PROTON’s sports utility vehicles (SUV) X70 and X50, launched in 2018 and 2020, remain key models in the sub-segment in the country. As of end-July 2023, PROTON’s sizeable orders of 67,582 units provide earnings visibility in the near term. For 2022, its revenue and pre-tax profit grew sharply to RM9.4 billion and RM183.9 million (FY2017: RM3.7 billion; pre-tax loss of RM890.0 million).      

The rating agency notes that in addition to PROTON, DRB-HICOM's other automotive marques — including Honda, Mitsubishi, and Isuzu — have also generated strong sales in recent years. In 1H2023, DRB-HICOM sold 130,075 vehicles, translating to an overall 35.5% market share. Accordingly, the automotive segment is expected to boost the holding company's financial performance by way of higher dividend flow and repayment of loans. MARC Ratings expects demand to be supported by recent launches — PROTON’s X90 in May 2023, and Honda’s WR-V in July 2023 — and new models, although achieving strong sales as in the recent past would depend on the strength of consumer sentiments and accommodative financing environment.     

Notwithstanding the group’s entrenched market position in the domestic automotive sector, afforded by its longstanding experience and expertise, the ratings have also factored in the group's healthy liquidity position and financial flexibility through its considerable landbank. MARC Ratings also notes that funding pressures from the holding company to the subsidiaries have also abated in recent years and expects any expansion, including PROTON’s investment to strengthen its assembly facilities in Tanjung Malim, to be funded at the subsidiary level. This also includes any funding requirement for its 53.5%-held Pos Malaysia Berhad which has faced challenges in turning around its performance. The rating agency understands that any meaningful results from Pos Malaysia’s turnaround efforts can only be expected from 2024 onwards; in 9M2023, Pos Malaysia recorded pre-tax loss of RM73.3 million against revenue of RM1.4 billion.     

DRB-HICOM also generates recurrent but modest earnings from concession assets (PUSPAKOM Sdn Bhd, Angkasapuri Media City, and the Integrated Immigration, Customs, Quarantine and Security (ICQS) Complex in Bukit Kayu Hitam, Kedah). It also has a sizeable outstanding order book of RM8.2 billion until 2038 through Composites Technology Research Malaysia Sdn Bhd (CTRM), a manufacturer of aircraft components.      

For 9M2023, group revenue and normalised pre-tax profit increased by 8.2% and 10.3% y-o-y to RM12.1 billion and RM401.2 million, driven by automotive sales. Group borrowings, excluding borrowings at Bank Muamalat Malaysia Berhad (Bank Muamalat), stood at RM6.7 billion, of which the bulk resides at the holding company (50%) and PROTON (22%). Adjusted debt-to-equity (DE) and net DE ratios stood at 0.67x and 0.44x.     

Rating trajectory

Upside/downside scenario     

The ratings could be upgraded if its current credit profile is broadly maintained. Conversely, the outlook could be revised back to stable if there is a notable reversal in group performance and/or if debt metrics were to weaken from expectations.