Investment Highlights

• We maintain a HOLD call and an FV of RM1.99/share on DRBHicom. We cut our FY19/20/21 projection by 81%/27%/31% to account for a late entry by the X70 and weakening prospects for its other segments in the immediate period.

• For 2QFY19, there was a huge sequential improvement in revenue and it saw a small core net profit of RM3mil. Revenue (+20% QoQ/ -2% YoY) was supported by higher car sales during the tax holiday.

• It was especially beneficial for Proton, which has had no organic catalyst and saw a two-year high of 22K units in the quarter. Consequently, DRB’s bottom line benefited from smaller automotive losses.

• On its other segments: services saw slightly stronger revenue (+1% QoQ/+4% YoY) but PBT has been on a downtrend as its margin has halved to 5% for the past half-year. The higher revenue was due to better sales by Bank Muamalat and its concession businesses.

• Property earnings were substantially lower as DRB said it had completed the first phase of a major project (Integrated Customs, Quarantine and Security Complex).

• For 1HFY19, revenue was weaker 8% YoY due to a topline decline across the board. It was especially hit by the low car sales during 1Q and weaker property sales due to the aforementioned factor.

• However, its core net loss for the period shrank 84% YoY to RM36mil after accounting for several exceptional items, the outstanding one being the RM1.1bil grant received last year.

• Apart from lower losses from automotive, its PBT from services fell due to weaker margins and PBT from property was slightly lower.

• Overall, it managed to reduce losses from its automotive segment due to the cushion of the tax holiday. Its two other segments are still profitable but both did worse on a YoY basis. The group provided no guidance on the strategy to recover margins for services, or halt the decline in the topline of its property segment.

• The group remains backboned by Proton. The Proton X70 SUV will be launched this December and pre-launch bookings of over 10K should anchor sales for the first few months. Any earnings impact should be felt more visibly in DRB’s 4QFY19 and clearer in FY20.

• We caution that the entry of the SUV may not serve to turn around its automotive segment immediately but could reduce the volatility inherent in DRB earnings. We believe the group should build a captive market for the X70 ahead of its localization and the bigger plan to make Proton profitable with both domestic and exports sales of the model.

Source: AmInvest Research - 30 Nov 2018