DRB-Hicom - Auto earnings to rebound BUY

• We maintain our BUY recommendation on DRB-Hicom with our fair value unchanged at RM4.00/share, based on 10% discount to our sum-of-parts valuation of RM4.40/share.

• DRB reported a net income of RM80mil in 3QFY12 bringing its 9MFY12 earnings to RM275mil. This is largely in line with our expectations, representing 70% of our full year estimates but came short of consensus numbers, covering only 64%. 

• The group also announced an interim dividend of 2 sen/share during the quarter. We have assumed a pay-out ratio of 20% which translates to a DPS of 4.1sen or a yield of 2%. 

• Core earnings dropped by 16% from RM329mil last year as its automotive division’s profit was hampered by the supply disruption of auto components caused by the recent flood in Thailand, resulting in the closure Honda’s plant in Pegoh.

• But auto earnings should recover over the next few quarters as (1) the Pegoh plant is expected to be reopened next month. (2) Impact from partnership with Volkswagen will be seen in the next few quarters.

• The Pegoh plant is expected to produce 50,000 vehicles (vis-a-vis 44,000 units pre-supply crisis) to make up for lost grounds, having been out of operations for six months. The stronger volume will be underpinned by the launch of the new Honda City in April.

• Passat CKD model will be launched in 2Q2012 and we suspect the model should be priced at about RM170k which should provide stiff competition to Toyota Camry. Currently about 300 units of the Passat CKD model have been produced but this should grow to 3,000 units to 5,000 units for 2012. We are estimating 35% growth in DRB’s auto division earnings for FY13F.

• Having said that, weak auto earnings were compensated by strong Pos Malaysia’s numbers, having reported 70% jump in earnings to RM112mil. Apart from the full impact of new tariff, there were some cost savings since DRB took over with operating margins at 12% from 10% last year.

• While focus will remain on plugging the leakages within Pos, we believe the ‘end-game’ would be to reap the synergies with its sister company, Bank Muamalat. The latter would be able to leverage on POSM’s extensive network thus increasing its presence and brand awareness in the country.

• DRB’s valuations remain attractive, currently trading at CY13 PE of 9x (vis-a-vis its peers of 14x) and P/B of 0.9x.

Source: AmeSecurities