MARC 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. All ratings carry a stable outlook.

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 domestic market share was largely due to strong sales growth of its new PROTON models, namely X70 and X50, and upgrades of existing ones, undertaken by key operating subsidiary, Proton Holdings Berhad (PROTON). The high sales volume led to PROTON recording strong revenue of RM6.1 billion in 2020, 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. 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.

Umar Abdul Aziz, +603-2717 2962/ umar@marc.com.my; 

Glenn Wong Liu Yu, +603-2717 2961/ liuyu@marc.com.my;

Taufiq Kamal, +603-2717 2951/ taufiq@marc.com.my.