CREDIT ANALYSIS REPORT

DRB-HICOM BERHAD - 2021

Report ID 60538900403 Popularity 58 views 22 downloads 
Report Date Nov 2021 Product  
Company / Issuer DRB-Hicom Bhd Sector Trading/Services - Conglomerates
Price (RM)
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Rationale
Rating action     
MARC has affirmed its ratings of A+IS and A-IS on DRB-HICOM’s Sukuk Programme of up to RM3.5 billion and Perpetual Sukuk Musharakah Programme of up to RM2.0 billion. The two-notch rating differential between both issuances reflects the subordination of the perpetual sukuk to the senior sukuk in line with MARC’s notching principles on hybrid securities. All ratings carry a stable outlook.

Rationale
The ratings affirmation incorporates DRB-HICOM’s continued strength in its key automotive segment that is reflected by its strong market position and steady contribution to group profitability, recurrent income from a government defence contract and concession assets as well as healthy liquidity. The ratings are mainly moderated by the weakening performance of its subsidiary POS Malaysia Berhad due to the decline of its core conventional mail operations, and by concerns that automotive sales could decline after the expiry of the sales tax holiday.

We view that DRB-HICOM’s long operating track record of assembling and distributing established models has enabled the group to weather the impact from pandemic-induced lockdowns and closures. The resilience of its automotive sales during this period was aided by the sales tax holiday. For 1H2021, DRB-HICOM recorded a sales volume of 93,323 units or 37.5% of total industry volume (TIV) of 249,171 units (2020: 35.3%; 2019: 33.8%). We note that the improvement in its domestic market share was largely due to strong sales growth of its new PROTON models, namely X70 and X50, and upgrades of existing models, undertaken by key operating subsidiary, Proton Holdings Berhad (PROTON). DRB-HICOM has a 50.1% stake and the balance is held by China-based automaker Zhejiang Geely Holding Group (Geely). The high sales volume led to PROTON recording strong revenue of RM6.1 billion in 2020 (2019 (9 months): RM4.6 billion), although it recorded a slight pre-tax loss of RM13.6 million partly due to amortisation of a new plant. 

We note that after successfully turning around PROTON in 2019, the company has continued to implement plans to strengthen its position for which it has established a term loan facility of USD357 million. This has substantially reduced reliance on DRB-HICOM to fund its operations and capex; PROTON will instead seek funding on its own with the holding company acting as guarantor for the facility. 

At end-1H2021, group borrowings rose to RM8.6 billion, mainly on consolidation of PROTON’s borrowings (2020: RM7.4 billion), leading to adjusted gross and net debt-to-equity (DE) ratios of 0.96x and 0.68x. DRB-HICOM’s liquidity position remains strong with unrestricted cash balance of RM2.6 billion that is more than sufficient to meet its upcoming financial obligations of RM1.3 billion. For 1H2021, the group narrowed its pre-tax loss to RM243.2 million from negative RM551.1 million a year earlier. The loss was largely contributed by the continued weak performance of POS Malaysia which recorded a pre-tax loss of RM165.5 million in 1H2021 (2020: negative RM303.5 million). The rising demand for its courier services and the recent tariff revision for commercial postal rates in February 2020 have not been enough to offset the weakness in its conventional services. In the near term, the group’s profitability will continue to be moderated by POS Malaysia’s performance. 

Providing some support are the earnings from the group’s outstanding RM516.7 million government defence contract, and its concession assets, namely the Northern Gateway immigration complex, the Angkasapuri Broadcasting System, and PUSPAKOM. The performance of its banking subsidiary Bank Muamalat Malaysia Berhad has continued to improve as demonstrated by a higher net financing margin of 2.66% (1H2020: 2.04%). Better asset quality with gross impaired financing (GIF) ratio narrowing to 1.07% as at-end 1H2021 (end-1H2020: 1.31%) will also support earnings.

Rating outlook     
The stable outlook reflects MARC’s expectation that DRB-HICOM’s strong operational track record and market position in the automotive segment will continue to support group performance.

Rating trajectory

Upside scenario     
Any upside in the rating and/or outlook would consider a substantial and sustained improvement in the leverage position to below 0.6x, and an improvement in the group’s performance metrics.

Downside scenario    
Downward rating pressure would arise if group profitability weakens further without near-term visibility for improvement and/or if leverage position were to weaken to above 1.0x.

Key strengths
Major domestic automotive player
Recurrent earnings streams from concession assets and contracts
Strong liquidity position 
Sizeable landbank a source of financial flexibility

Key risks
Residual impact from pandemic-induced measures on group performance
Prevailing weakness in subsidiary POS Malaysia’s conventional mail services


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