Investment Highlights

• We maintain a HOLD and an FV of RM1.99/share on DRB-Hicom. 9MFY19 core net profit of RM25.2mil exceeded our FY expectation of RM10.4mil but made up 31% of consensus estimate of RM80.8mil. We adjust our FY19 earnings upwards to RM55mil and raise FY20–21 by 5–7%.

• DRB saw a core net profit of RM62mil in 3QFY19 on the back of better Proton sales and higher revenue from its banking services. The introduction of the Proton X70 in December boosted its auto segment revenue by 41% YoY as sales improved 6% YoY and its ASP rose to a two-year high of RM62K.

• Proton revealed that it had delivered 7K units of the Proton X70 in total (from bookings of 18K), implying sales of 2.9K in February. This was similar to the 2.8K sold in January and higher than the 1.3K sold in the last 20 days of December. Sales should see steady support for 2–3 months by meeting the remainder of bookings at the current pace.

• For 9MFY19, DRB saw a core net profit of RM25mil vs. a core net loss of RM161mil in the previous corresponding period. The latter notably excludes the RM1.1bil R&D reimbursement grant received in 2QFY18.

• The YTD improvement is due to lower core losses from auto and investment holding, while PBT from the services segment dropped by 24% YoY and the property, asset & construction (PAC) segment was flat. The improvement in auto stemmed largely from the defence & aviation (D&A) sub-segment, which saw a higher contribution from the AV8 contract and aviation programmes served by CTRM. The segment registered a loss before tax of RM208mil and Proton’s share of this was not disclosed.

• D&A topline improved 17% YoY while Proton’s fell 8% YoY and the automotive distribution (AD) tumbled 40% YoY. The latter saw poorer sales of Honda and Isuzu cars, while Proton sales were flat and Mitsubishi’s up 58% YoY in the YTD period.

• Revenue from PAC dropped 47% YoY but its PBT was flat at RM125mil in 9MFY19. DRB said the lower revenue was from the near-completion of Phase 1 of the Integrated Customs, Quarantine & Security Complex in Bukit Kayu Hitam in Kedah. Margins in this segment have been volatile (ranging from negative 5% to 84%) in the past two years as both revenue and PBT follow no discernible trend. The segment formed 4% of the group’s revenue in 9MFY19.

• The group remains backboned by its automotive segment. The earnings impact from sales of the CBU units of the Proton X70 has started to materialize. We reiterate that the entry of the SUV will not serve to turn around the automotive segment in a fundamental way but could reduce the inherent volatility 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 domestics and exports sales.

Source: AmInvest Research - 1 Mar 2019