CIMB Research Retains Add For DRB-Hicom, Target Price RM2.90

CIMB Research Retains Add For DRB-Hicom, Target Price RM2.90 - CIMB Equities Research is retain its earnings forecast and Add call for DRB-Hicom with an unchanged sum-of-parts based target price of RM2.90.

It said on Tuesday that narrowing losses by Proton, strengthening of the ringgit against the US dollar and higher net profit contribution from the services division are potential re-rating catalysts. 

However, key downside risks to its call are widening losses at Proton and weaker contribution from the services division.   

CIMB Research visited DRB-Hicom’s 34% associate, Honda Malaysia Sdn Bhd vehicle assembly plant in Hicom Pegoh Industrial Park, Alor Gajah, Melaka together with 20 buy-side analysts and fund managers recently. 

They also visited DRB-Hicom’s 97% subsidiary, Composites Technology Research Malaysia (CTRM) plant in Batu Berendam, Melaka. 

To recap, Honda Malaysia began operations at the Pegoh plant with a single assembly line in January 2003 with a 20,000 units production capacity per annum.

Now, the Pegoh plant can produce up to 110,000 units per annum across two assembly lines. The top three best-selling models; City, HR-V and Civic, make up 60% of Honda’s total sales volume. 

Honda Malaysia does not plan to increase its production capacity within the next three years in light of tepid domestic total industry volume (TIV) growth. Honda is targeting flat volume of 109,000 in 2018. 

CIMB Research pointed out that Honda has been the largest non-national brand in Malaysia since 2015. 

It posted an impressive 19% on-year volume growth in 2017 driven by new model launches such as Civic and City. 

Honda is also riding on growing popularity of sports utility vehicles with the launches of BR-V, HR-V and CR-V. 

Moreover, steady growth in localised content penetration from 30-40% in 2014 to 60-70% today driven by expansion of component suppliers, allows Honda to price its products competitively.    

As for CTRM, it is involved in the manufacturing and testing of composites components for aero structure and non-aero structure segment. 

CTRM counts the likes of Tier 1 suppliers such as Spirit AeroSystems and UTC Aerospace (UTAS) as its key customers, which supply components to Airbus and Boeing. 

The group is not overly concerned about customer dependency given its strong position as a single source supplier for most of its product portfolio. 

CTRM has an outstanding order book of RM9.5bil until 2031. The group is in the midst of constructing a new plant; Building 6, which is expected to be ready in September 2018. 

Building 6 will have a total built-up area of 205,000 sq ft and it will mainly support the Airbus A320 and A350 programmes. 

The new plant will raise the group production capacity by 15%-20%, given CTRM is running at 85% utilisation. 

“We expect the new plant to contribute additional RM200mil revenue to the group,” CIMB Research said.