CREDIT ANALYSIS REPORT

DRB-HICOM Berhad - 2022

Report ID 6053890046906 Popularity 57 views 6 downloads 
Report Date Sep 2022 Product  
Company / Issuer DRB-Hicom Bhd Sector Trading/Services - Conglomerates
Price (RM)
Normal: RM500.00        
  Add to Cart
Rationale
Rating action     
MARC Ratings has affirmed its ratings of A+IS and A-IS on DRB-HICOM Berhad’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 latter’s subordination to the senior sukuk, in line with MARC Ratings’ notching principles on hybrid securities. All ratings carry a stable outlook. The outstanding under the programmes stood at RM2.3 billion and RM350.0 million, respectively, as at September 8, 2022.

Rationale     
DRB-HICOM’s strong market position and track record in the domestic automotive industry as well as healthy liquidity position remain key rating drivers. These strengths are further supported by recurrent income streams from concession assets and contracts. The ratings are mainly moderated by thin margins in the automotive segment and the weak performance of its key subsidiary, Pos Malaysia Berhad, due to the postal company’s cost and revenue structure.

The group’s established strength in assembling and distributing popular models, and the sales tax holiday from June 2020 to June 2022 have supported its performance during the pandemic period. DRB-HICOM’s share of total industry volume (TIV) has remained above 35% since 2020 due to the healthy sales performance of PROTON, Honda and Mitsubishi models. For 1H2022, DRB-HICOM sold 116,976 vehicles (2021: 191,745 vehicles; 2020: 187,509 vehicles), with the sales volume improvement largely attributed to its PROTON models, particularly Saga, X50 and X70, which are assembled and distributed by 50.1%-owned subsidiary, PROTON Holdings Berhad (PROTON) in which China-based Zhejiang Geely Holding Group (Geely) holds the remaining 49.9% stake. We note that PROTON has continued to invest in strengthening the assembly facilities in its Tanjung Malim plant, with the funding for expansion undertaken at its level. This has substantially reduced its reliance on DRB-HICOM for financial assistance as has been in the past.

PROTON’s market share stood at 17.3% as at end-June 2022; given a high backlog of 90,000 units, its sales performance is expected to be sustained over the near term. New models from other marques, including Mitsubishi’s Triton and XPANDER as well as Honda’s City Hatchback, Civic and HR-V, are expected to support group sales. Notwithstanding these, the industry continued to be affected by supply chain disruptions while rising inflation and interest rates could also lead to softer demand.

DRB-HICOM’s 53.5%-owned subsidiary Pos Malaysia has continued to drag group performance; the postal subsidiary registered pre-tax loss of RM331.4 million in 2021 due to high operating costs. This has been exacerbated by the growing insourcing of deliveries by major e-commerce companies which has reduced services required from the postal company. Pos Malaysia has embarked on a turnaround plan under a new management since August 2021 that has included rationalising its mail branch network and infrastructure, diversifying its customer base, and implementing a seven-day week for operations. For 1H2022, Pos Malaysia's pre-tax loss narrowed to RM29.7 million from a negative RM165.5 million in the corresponding period last year. We expect the management’s continued focus to adhere to prudent cost management will lead to a rebound in Pos Malaysia’s earnings over the near term.

DRB-HICOM’s concession assets, the integrated Immigration, Customs, Quarantine and Security (ICQS) complex in Bukit Kayu Hitam, Kedah, and PUSPAKOM Sdn Bhd provide moderate earnings; the two assets registered combined pre-tax profit of RM23.0 million in 2021. Its wholly-owned subsidiary, Composite Technology Research Malaysia Sdn Bhd (CTRM), a second-tier component manufacturer for aircraft with outstanding long-term contracts worth RM4.9 billion, registered earnings of RM28.3 million in 2021.

At end-1H2022, group borrowings stood at RM8.9 billion, translating to gross and net debt-to-equity (DE) ratios of 0.97x and 0.62x, higher than as at end-2021 as borrowings at PROTON rose, mainly to fund its capex. The group’s recent issuance of RM350 million perpetual sukuk in August 2022 will not have a material impact on its leverage position given the 50% equity credit accorded to the issuance. DRB-HICOM’s liquidity position remains strong with cash balance of RM3.1 billion against upcoming term obligations of RM1.2 billion. For 1H2022, the group generated adjusted pre-tax profit of RM113.7 million, an improvement from the full-year pre-tax loss of RM291.3 million in 2021.

Rating outlook    
The stable outlook reflects MARC Ratings’ expectation that DRB-HICOM’s credit profile will remain in line with its rating, supported by a strong operational track record in its automotive segment that would offset any weaker performance of other segments.

Rating trajectory     

Upside scenario     
Any upside in the rating and/or outlook would consider a meaningful turnaround in Pos Malaysia’s credit profile, continued improvement in the group’s performance metrics and a sustained group net leverage position of below 0.6x.

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

Key strengths     
  • Major domestic automotive player
  • Recurrent earnings from concession assets and contracts
  • Healthy liquidity position
  • Strong source of financial flexibility from sizeable landbank
Key risks     
  • Turning around Pos Malaysia’s business and credit profile
  • Production disruption from supply chain issues in the automotive industry 


Related