PETALING JAYA: AmInvestment Bank has downgraded DRB-Hicom Bhd to “underweight” from “hold” with a lower fair value of RM1.74 due to potential negative sentiment arising from the arrest of the group’s executives by the Malaysian Anti-Corruption Commission (MACC).
There are also uncertainties in respect of the group’s ability to secure government contracts in the future following the scandal, the research said in its report today.
The stock slipped 1 sen or 0.5% to close at RM2 today with 6.13 million shares changing hands.
On Monday, DRB-Hicom confirmed that the MACC has remanded two top executives of its wholly owned subsidiary Defence Technologies Sdn Bhd (Deftech), in connection with a graft probe on a RM17 million defence contract.
The executives were alleged to have received hundreds of thousands of ringgit between 2014 and 2017 from several companies in relation to the award of the contract. The contract was to supply equipment for the Deftech AV8 Gempita and ACV-300 Adnan armoured combat vehicles to a defence agency.
“There may be questions if this is an isolated case or whether there is a need to relook the company’s procurement process. Also, it is uncertain if the incident will have any effect on the group’s standing in future government defence contracts. With that said, we believe that our increase in the sum-of-the-parts discount rate is justified based on the potential negative sentiment arising from the MACC probe,“ said AmInvestment Bank.
However, RHB Research maintained its “buy” call on DRB-Hicom with a higher target price of RM2.63 from RM2.30.
“With Proton X70 sales exceeding expectations and cost cutting measures showing some tangible results, we are more upbeat on Proton’s turnaround prospects than ever before. The exciting pipeline of new models in new market segments should help rehabilitate its branding. Establishing an assembly plant in Pakistan marks a major move to penetrate export markets.”
It is anticipating Proton to register significantly lower losses in the upcoming quarters, thanks to cost reduction initiatives and better-than-expected sales of the X70.
Proton’s management revealed that it managed to cut components cost by 10% last year after teaming up with Geely to make bulk purchase of raw materials. To achieve a further 20% reduction, Proton will need a consistent sales volume track record to further convince its vendors. Proton is also reducing its regional car parts warehouses to lower costs further.
“X70 is the best-selling sport utility vehicle. Sales of X70 exceeded expectations after 11,000 units were delivered since its launch in December 2018 (8,579 units was sold in Q1’19), and 70% of the sales is for the top Premium variant. The recent launch of the Proton Iriz and Proton Persona facelift models at significantly lower prices should help increase sales volume and bolster Proton’s currently underutilised capacity. The next new model is likely to be the SX11 (based on Geely Binyue), towards end-2019.”
RHB Research raised DRB-Hicom’s FY20-21 forecast by 14% and forecast a narrower loss for FY19 after imputing better-than-expected sales performance of the X70 and cost cutting measures. The key risk is Proton’s inability to maintain product quality when local assembly commences.
