Investment Highlights

• We maintain our BUY recommendation for DRB-Hicom with an unchanged SOP-based FV of RM3.18/share.

• As announced in July 2019, DRB-Hicom has changed its financial year-end to 31 December from 31 March. Therefore, we refine our estimates to cover the 9-month period ending 31 December 2019 instead of the original 12 months.

• DRB-Hicom’s 1QFY19 core net profit of RM45.6mil was in line with our expectations, accounting for 34% of our estimates. As it is only the first-quarter earnings, we are keeping our estimates unchanged. We expect DRB’s earnings to be less volatile going forward after the group’s automotive segment convincingly returned into the black in the previous quarter.

• DRB’s automotive division recorded a higher revenue of RM2.2bil (+8% QoQ, +59% YoY) and a PBT of RM122.0mil. The drop in QoQ PBT was due to: i) the timing of completion of AV-8 under the defence segment; ii) favourable changes to product mix; and iii) write-backs of unutilized provisions in 4QFY18.

• Based on our back-of-the-envelope estimates, Proton has registered yet another quarter of operating profit, similar to 4QFY18. In 1QFY19, Proton delivered 25.2K units of vehicles (+38% QoQ, +77% YoY) whereby the X70 comprised 6.6K of the total sales (-23% QoQ).

• DRB’s services division posted a lower revenue of RM1.1bil (-10% QoQ, -2% YoY) and a PBT of RM26.6mil (-1% QoQ, -53% YoY). We witnessed drags with lower revenues in all of the sub segments in the services division except for education.

• Notable drags on its earnings included the logistics business which recorded a lower revenue of RM547.0mil (-3% QoQ, - 3% YoY). The business was impacted by a competitive business environment which faces price and costs challenges. The group said it is making ongoing efforts to address the issues faced mainly by Pos Malaysia.

• DRB’s PAC division reported a revenue of RM115.4mil (-35% QoQ, -19% YoY) and a lower PBT of RM17.1mil (-87% QoQ, - 43% YoY). This was mainly due to lower revenue recognized by the division’s construction related projects – namely Media City Development.

• Proton’s turnaround is gradually gaining traction through its impressive sales volume momentum while the upcoming introduction of the X70 and X50 CKD is expected to sustain the strong sales of vehicles seen recently. There remains potential upside to the DRB-Hicom’s share price due to the group’s ongoing aggressive efforts to revive and win investors’ confidence in the Proton brand.

Source: AmInvest Research - 26 Aug 2019