KUALA LUMPUR: Because of the surge in tax bill to RM230.67 million, DRB-Hicom Bhd’s annual net profit came in substantially lower at RM122.87 million for the financial year ended March 31, 2019 (FY19) versus RM91.58 million in the preceding year.

However, for the fourth quarter ended March 31, 2019 (4QFY19), the diversified conglomerate posted a net profit of RM127.86 million — a contrast to a net loss of RM59.41 million in the previous corresponding quarter. Why the sharp improvement in quarterly earnings?

DRB-Hicom attributed the better performance to selling more cars during the quarter under review, particularly Proton cars.

This set of results has convinced more in the investing fraternity that its 50.1%-owned subsidiary Proton Holdings Bhd, which was once a bleeding centre, is now driving DRB-Hicom on a fast growth track.

The group’s share price went up 10 sen or 5.05% to RM2.08 last Friday after the release of the quarterly results.

According to an analyst who spoke on the condition of anonymity, so long as sales volumes for Proton’s cars are maintained or exceed current levels, DRB-Hicom is expected to remain profitable and profit growth is likely. There is a backlog of orders for the X70 sport utility vehicle.

In addition, he said the cost-cutting measures put in place at Proton and at a group level have materialised. This helps enhance DRB-Hicom’s profitability.

“While they (Proton) are not breaking even yet, the losses are a lot lower compared with previous quarters,” said the analyst.

He added that Proton car sales are expected to rise, as the group is also going to introduce new versions of its Iriz, Persona, and Exora models this year.

In a research note dated May 31, PublicInvest Research pointed out that Proton’s sales volume ballooned 42% year-on-year (y-o-y) to 18,281 units, while its sales value expanded 63% y-o-y to RM1.3 billion for FY19. Of the 30,000 X70 orders received in 4QFY19, 14,000 units have been delivered.

On top of that, better performances by Mitsubishi and Isuzu marques also helped lift the profit contribution from the joint venture in FY19.

PublicInvest Research maintained their “buy” call while raising their target price (TP) to RM2.30 from RM2.10 previously.

In contrast, Kenanga Research downgraded DRB-Hicom to “underperform” from “market perform”, with a lower TP of RM1.80, versus RM1.90 previously as the earnings figures came below its estimates.

DRB-Hicom posted a core net profit of RM183 million, which was substantially below Kenanga Research’s forecast of RM350.7 million for FY19. However, the market consensus estimate was RM100 million.

In a financial result review, Kenanga Research pointed out that Honda cars saw a decline of 6% to 100,290 units, as consumers were holding back in anticipation of newer models. “Honda only launched the facelift HR-V and the Mugen variants of the Honda Jazz and BR-V — in contrast with Proton who launched the X70, and is also planning to launch revamped versions of the Iriz, Persona and Exora,” it wrote.

However, not all segments in DRB-Hicom are doing well. The group’s 53.5%-owned subsidiary Pos Malaysia Bhd has turned into a loss contributor. It was once a key profit contributor when Proton was bleeding badly before. The postal group incurred annual net loss, raising some concerns.

In FY19, Pos Malaysia recorded its biggest annual loss yet against a net profit of RM93.25 million a year ago, despite just a 5% decline in revenue to RM2.36 billion from RM2.47 billion in the previous year.

This was Pos Malaysia’s first loss since FY08 — with 4QFY19 being the third quarterly consecutive loss the group experienced.

Hong Leong Investment Bank Research analyst Daniel Wong, however, does not think that the loss at Pos Malaysia is a big concern, noting that while significant on a company level, the losses do not have a significant impact on a group level.

“If you look at DRB-Hicom as a whole, Pos Malaysia is a small portion of the group,” said Wong, adding that the main reasons Pos Malaysia posted a quarterly net loss were due to one-off impairments and costs.

Wong explained DRB-Hicom’s other segments, such as Bank Muamalat Bhd and property business, would be able to soften the blow caused by the national postal group.

Another analyst commented that the losses stemming from Pos Malaysia have been priced into earnings estimates, and that Proton is the main priority due to its history of being the group’s biggest loss-making business.

Some analysts opine that DRB-Hicom’s 4QFY19 results are reason enough for investors to have a second look at the stock. Nonetheless, the cautious ones pointed out that the patchy economic growth outlook may not augur well for car sales.