Slight cut in earnings estimates; maintain Buy with lower TP of IDR1,800

DRMA margins have deteriorated in the past two quarters due to low production volume. Indeed, when dissecting into the segments, we notice 4W gross margins declined from 16% in 1Q22 to 11% in 2Q24 (see Fig. 1) due to a decline in wholesales in 6M24 by 19% y-y. But DRMA is gaining market share in 2W thanks to its efficiency and thus its gross margin still expanded from 17% in 1Q22 to 20% in 2Q24. DRMA also gets to export its electronic parts given their efficiency and this could support its overall earnings, in our view. DRMA has also done significant R&D in the EV space and also created Dharma Connect, which we believe are promising long-term initiatives. We maintain our Buy rating on DRMA.

Dissecting 4W and 2W business

4W wholesales in Indonesia in 6M24 dropped by 19% y-y (see Fig. 7) due to tight financing from multi-finance companies. Lower volume thus impacted DRMA margins. In 2W, however, DRMA obtained new orders from Honda Stylo to supply some spare parts, as DRMA offers competitive prices, in our view. We believe this helps the overall margins of the company.

Export market and R&D in EV space and beyond

DRMA's subsidiary, Dharma Kyungshin Indonesia (DKI, unlisted), started to export wiring harness to the US in mid-2Q24 and thus, its revenue jumped 61% y-y and earnings 95% y-y in 1H24. We believe this will continue in 2H24F and beyond. DRMA's initiative in launching Dharma Connect, venturing into the EV space such as battery packs, charging stations, and working with global players are also promising in the long term, in our view.

Slight cut in earnings estimates but maintain Buy

We cut 2024F earnings by 7.2%, reflecting weakness in the auto market. Our new TP of IDR1,800 (IDR1,850 earlier) is based on DCF valuation, with WACC of 7.6% and a terminal growth rate of 2.5%. At our TP, the stock would trade at a 2024F P/E of 14.2x (vs 8.5x at the current price). Upside risks include: 1) a much stronger-than-expected rebound in 4W sales; and 2) market share gains. Downside risks include: 1) further margin erosion in the 4W segment, continued sluggish recovery in 4W sales; 2) slower economic growth; and 3) low liquidity of the stock turnover.

Fig. 1: DRMA gross margin and sales trends by segment

 

Fig. 2: Valuation methodology

IDRbn	2024F	2025F	2026F	2027F	2028F	2029F	2030F	Terminal Value
EBITDA	861	972	1,078	1,241	1,341	1,435	1,517					WACC calculation
(-) Tax	162	177	192	219	231	242	249					Cost of Equity
(-) Capex	631	563	613	669	667	699	759					Rf	6.8%
(+) Δ Chg in working capital	46	24	34	44	57	67	79					Beta	0.8
FCFF	113	255	306	397	501	561	588	11,918				MRP	7.5%
												CoE	13%
												Equity weight	23%
		1	2	3	4	5	6	6
PV factor		93%	86%	80%	75%	69%	65%	65%				Cost of Debt
PV Value			265	319	374	390	380	7,699				CoD	7.5%
												After-tax CoD	5.9%
Equity value (IDRbn)	8,365											Debt weight	77%
Net debt (cash)	13
Enterprise value (IDRbn)	8,352											WACC	7.6%
Sh outstanding (mn)	4,706											Terminal Growth	2.5%
Target px (IDR/sh)	1,800

 

Fig. 3: Revenue and domestic unit sales forecast

 

Fig. 4: Core NPAT growth

 

Fig. 5: EV sales and penetration trends

 

Fig. 6: DKI revenue and NPAT trends

 

Fig. 7: 4W wholesales

 

Fig. 8: DRMA Connect — DRMA initiatives in the EV space

INVESTMENT RATINGS
A rating of ‘Buy’, indicates that the analyst expects the stock to outperform the Benchmark over the next 12 months. A rating of ‘Neutral’, indicates that the analyst expects the stock to perform in line with the Benchmark over the next 12 months. A rating of ‘Reduce’, indicates that the analyst expects the stock to underperform the Benchmark over the next 12 months. A rating of ‘Suspended’, indicates that the rating, target price, and estimates have been suspended temporarily to comply with applicable regulations and/or firm policies. Securities and/or companies that are labelled as ‘Not Rated’ or ‘No Rating’ are not in regular research coverage. Benchmark is Indonesia Composite Index (‘IDX Composite’). A ‘Target Price’, if discussed, indicates the analyst’s forecast for the share price with a 12-month time horizon, reflecting in part of the analyst’s estimates for the company’s earnings, and may be impeded by general market and macroeconomic trends, and by other risks related to the company or the market in general. 

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Source: LSEG, Verdhana