Investment Highlights

• We maintain a HOLD on DRB-Hicom but with a higher SOP-based fair value of RM1.75, which factors in a 20% discount.

• The group commendably shrunk its core net loss by 76%YoY to RM331mil from RM1.4bil in FY16. The result was slightly ahead of our projection of a RM380mil net loss and consensus' RM350mil.

• A decline in the auto segment was partly cushioned by better earnings from the services segment (which saw the consolidation of Pos Malaysia as a subsidiary from Sept 2016) and the property sector.

• There was no revenue growth in FY17. Moreover, the group still saw operational losses in three out of four quarters.

• The auto segment continues to be the weakest link, registering an operating loss of RM956mil (an improvement of 8% from RM1.0bil in FY16). The segment was especially hit by poorer sales for Proton (-23%YoY) and Mitsubishi (-16%YoY), although it saw some relief from better numbers by Honda (+10%YoY) and Isuzu (+3%YoY).

• As usual, auto losses ballooned in the group's fourth quarter (Jan-March), when it saw lower sales for nearly all of its brands.

• The improvement in its services segment (revenue +41%YoY, operating profit +28%YoY) can be largely attributed to the consolidation of Pos Malaysia, which is now a 53.5% subsidiary from a 32.2% associate before. Within the services segment, revenue from logistics tripled during the year, while the other two main segments (banking and concessions) saw a subdued growth.

• We reiterate that the real catalyst for DRB-Hicom is a clear recovery plan for Proton. The group has said it will formulate a 10-year plan with Geely for Proton, and that this would cover future models, capex and manufacturing and sales volumes. While the signing of an FSP ahead of the end-June deadline is positive, we await greater clarity on the first steps towards reforming Proton.

Source: AmInvest Research - 31 May 2017