This article first appeared in The Edge Malaysia Weekly on September 9, 2024 - September 15, 2024

DESPITE DRB-Hicom Bhd’s (KL:DRBHCOM) share price dropping to a 52-week low of RM1.09 last Tuesday, analysts do not see the stock as undervalued. The counter last traded at this level during the pandemic, when it closed at RM1.02 on Sept 23, 2020.

The stock’s lacklustre performance this year — having lost 18.84% of its value year to date — is despite its subsidiary Proton Holdings Bhd recording sales of above 100,000 units for the sixth consecutive year.

“I don’t see the correlation between improving sales at Proton and better earnings at DRB-Hicom. Hence, I don’t think the counter is undervalued,” says an analyst who covers the industrial conglomerate.

Closing at RM1.13 last Friday, DRB-Hicom was trading at 0.3 times its net asset value (NAV) and had a market capitalisation of slightly more than RM2 billion. For comparison, Oriental Holdings Bhd (KL:­ORIENT) and Sime Darby Bhd (KL:SIME), two other conglomerates with an automotive business, were trading at 0.5 times and 0.9 times NAV respectively.

One reason DRB-Hicom has been unable to fetch a higher valuation than its peers is Proton’s performance. An analyst who covers the stock points out that the car maker’s huge contribution to its parent’s revenue has not translated into a better bottom line.

DRB-Hicom owns 50.1% of Proton, with the rest held by Zhejiang Geely Holding Group, a China-based global automotive group that owns Volvo Cars, Lotus Cars Ltd and smart, in addition to its home-grown brands Geely, Zeekr and Polestar.

Despite higher sales at Proton over the last five years, DRB-Hicom’s share price has continued to trend lower, losing 54.47% of its value. In 2018, Proton sold 64,744 units of cars, the lowest in decades, before crossing the 100,000-unit mark in 2019, the first time since 2015.

The home-grown Malaysian automotive group’s sales continued to grow year on year (y-o-y), reaching 154,611 units in 2023. Between 2018 and 2023, its sales grew 138.8%, with the latest annual figure being the highest since 2012.

In the six months ended June 30, 2024 (1HFY2024), DRB-Hicom recorded RM8.09 billion in revenue. Proton’s revenue during the period was RM4.45 billion, or around 55% of the group’s total. Meanwhile, DRB-Hicom’s total automotive business revenue was RM5.59 billion.

This means Proton contributed almost 80% to DRB-Hicom’s automotive revenue, which in turns made up 69% of the group’s revenue. As such, the conglomerate’s fortunes are largely dependent on its automotive business.

Improving sales at the Shah Alam-headquartered automotive group should benefit DRB-Hicom. However, this does not seem to be the case when looking at the downward trend of its share price over the past five years.

Based on DRB-Hicom’s financial statements and operational reports, the group’s automotive profits largely come from its joint ventures (JVs) and associate companies, rather than Proton.

In 1HFY2024, the automotive business reported a profit of RM169.63 million, before finance costs and tax expenses. Meanwhile, the group’s share of earnings from JVs and associate companies amounted to RM170.22 million. At RM169.63 million, the automotive business’ profit made up 51% of DRB-Hicom’s total segmental profit in 1HFY2024 (see table).

After finance costs, the group’s automotive business’ profit before tax (PBT), excluding its share of earnings from JVs and associate companies, amounted to RM108.35 million. This means the segment in which Proton is a large part of only contributed 45.77% to the group’s PBT of RM236.7 million.

DRB-Hicom’s most prominent JVs and associates include Honda Malaysia Sdn Bhd (effective interest of 34%), Isuzu Malaysia Sdn Bhd (effective interest of 48.42%) and Mitsubishi Motors Malaysia Sdn Bhd (effective interest of 48%).

Besides Proton, DRB-Hicom’s automotive subsidiaries include Hicom Holdings Bhd, which wholly owns Edaran Otomobil Nasional Bhd, DRB-Hicom Commercial Vehicles Sdn Bhd and Hicom Engineering Sdn Bhd.

This shows that despite Proton contributing almost 80% to the total revenue of DRB-Hicom’s automotive business in 1HFY2024, its profit was only 45.8% of the group’s PBT.

Last year, Proton posted a profit after tax (PAT) of RM291.78 million, according to the Companies Commission of Malaysia’s records. DRB-Hicom’s 50.1% stake in the group means that its share of Proton’s earnings came to RM146.18 million in FY2023.

At the same time, DRB-Hicom’s FY2023 PAT, including its share of earnings from JVs and associate companies, stood at RM394.35 million. This means Proton only contributed 37.07% to DRB-Hicom’s PAT for the period.

The outlook for the automotive industry in the second half of the year is weaker, which could mean lower sales and revenue for DRB-Hicom. Already, the revenue of the group’s automotive business had fallen 4.86% y-o-y to RM5.59 billion in 1HFY2024.

DRB-Hicom notes that Proton recorded lower revenue in the second quarter ended June 30, largely due to stiff competition, model mix and a scheduled plant shutdown. In 1HFY2024, the car maker sold 72,088 units, compared with 76,012 units in the previous corresponding period.

In contrast, Honda Malaysia sold 39,226 units in 1HFY2024 compared with 33,732 units in the same period last year. Mitsubishi Malaysia and Isuzu Malaysia saw lower sales y-o-y in 1HFY2024.

“A softer demand is anticipated in the second half of the year due to the expected fuel subsidy rationalisation, weaker consumer sentiment and a lack of catalysts for the auto sector. Additionally, the influx of new model launches and competitive pricing may intensify market competition, further squeezing sector margins and limiting earnings growth,” says Public Invest Research in an Aug 29 report.

The Malaysian Automotive Association in July revised Malaysia’s total industry volume forecast upwards to 765,000 units for 2024, from its previous estimate of 740,000 units. However, this is still below the 799,731 units sold last year.

Despite the lower sales this year, Proton has still managed to sell more than 100,000 units of vehicles. As at August, it had sold 101,489 units, lower than the 104,602 in the previous corresponding period.

Besides Proton’s low profit contribution to DRB-Hicom’s overall profit, the group’s earnings were also dragged down by the loss at Pos Malaysia Bhd. The fact that the postal service provider has huge assets led to DRB-Hicom having a low price-to-NAV.

The head of research at a boutique investment firm says if Pos Malaysia continues to post losses, it would be hard to justify a higher valuation for DRB-Hicom.

In 1HFY2024, Pos Malaysia reported a net loss of RM75.54 million, which was 38.17% higher than the net loss in the same period last year. The higher loss was due to lower revenue, higher cost of sales and operating expenses, as well as lower other income.

On DRB-Hicom’s books, the postal service provider’s segmental loss amounted to RM82.06 million during the period. This dragged the group’s total segmental profit down to RM332.35 million. Removing the loss at Pos Malaysia, DRB-Hicom’s total segmental profit would have been RM414.3 million.

Pos Malaysia has been in the red since the financial year ended March 31, 2019. It subsequently changed its year end to Dec 31. 

Another reason there isn’t much investor interest in DRB-Hicom is partly because of its history of asset injection by the controlling shareholder. 

Oriental is perhaps the entity most similar to DRB-Hicom because of its exposure to the automotive business and comparable segmental profit levels. In 1HFY2024, its total segmental profit stood at RM460.7 million, compared with DRB-Hicom’s RM332.35 million.

However, Oriental’s profit was derived from total assets of RM12.54 billion, compared with DRB-Hicom’s total assets of RM59.67 billion. In terms of book value, DRB-Hicom is 4.8 times larger than Oriental.

Oriental’s net profit in 1HFY2024 was RM357.66 million, compared with DRB-Hicom’s RM74.46 million. This means Oriental is 4.8 times more profitable than DRB-Hicom despite having a lower asset value.

The value of DRB-Hicom’s assets are much higher than that of Oriental because of the huge number of financial assets recognised on its books. For instance, it owns 70% of financial group Bank Muamalat Malaysia Bhd.

DRB-Hicom’s banking-related assets stood at RM24.63 billion as at June 30, 2024. In 1HFY2024, the banking segment reported a profit of RM140.9 million (before finance costs and tax).

Oriental’s shares were trading at RM6.84 on Sept 5, valuing the group at RM4.24 billion. The counter has appreciated 7.89% year to date. Based on its trailing 12-month (TTM) net profit of RM594.94 million, the stock is trading at 7.13 times earnings.

In contrast, DRB-Hicom had a market value of RM2.15 billion on Sept 5, a TTM net profit of RM171.73 million and a price-earnings ratio (PER) of 12.5 times. This shows that the counter is still more expensive than Oriental despite the share price languishing at current levels.

The various businesses under DRB-Hicom are worth much more than the group’s market cap when valued separately. As such, there is a higher intrinsic value to DRB-Hicom, which cannot be recognised because of its conglomerate structure.

For example, in ascribing a PER of 13 times to Proton’s FY2023 net profit of RM291.78 million, the group should be worth RM3.79 billion. This means its 50.1% share of Proton would be worth RM1.9 billion.

Even at a PER of 10 times, Proton could be worth RM2.92 billion and DRB-Hicom’s share would be worth RM1.46 billion. This is already 68% of its current market cap.

DRB-Hicom could be worth much more than its market capitalisation today if we include the value of Bank Muamalat, Puspakom Sdn Bhd — currently the sole provider of vehicle inspection services — and its property assets, as well as its aerospace and defence businesses under Composites Technology Research Malaysia Sdn Bhd and DRB-Hicom Defence Technologies Sdn Bhd. 

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