Investment Highlights

• We maintain a HOLD and an SOP-based FV of RM1.89/share on DRB-Hicom.

• The group saw a core net loss of RM668mil from a loss of RM710mil in the previous year. The improvement was aided by the recognition of an RM1.1bil R&D reimbursement grant for Proton (accounted for in other income of RM1.5bil), the consolidation of Pos Malaysia as a subsidiary and higher property earnings.

• The 1HFY18 results were within our FY projection of a RM310mil loss and below consensus projection of a RM230mil loss; given the expectation of better numbers from 2HFY18 as it shares Proton losses.

• The highlight for 1HFY18 was a 30% YoY increase in revenue: excluding Pos Malaysia (which was accounted for as an associate up to 2Q17), revenue would have risen by 7% YoY.

• The other surprise was a pre-tax profit for its auto segment, which the group said was buoyed by better sales of Proton (up 20% YoY, largely due to a low base: 1H17 sales was its worst in years) and Honda (up 16% YoY). Auto earnings sequentially swung into a profit in 2Q despite lower sales and revenue from Proton, which forms over half of the segment topline.

• DRB-Hicom also got a boost from its PAC (property, asset & construction) segment, which recorded a pre-tax profit of RM56mil in 1HFY18 compared to a loss of RM8mil last year. The group attributed this to the revenue recognition from ongoing projects such as the Northern Gateway Infrastructure and Media City.

• For its 2Q (core net loss of RM493mil, unchanged YoY), we highlight that group revenue would have improved 4% YoY (vs. the 26% recorded) if Pos Malaysia was excluded, while the auto segment churned a profit (despite sequentially Proton sales), and other areas such banking and concession saw unremarkable growth.

• We believe 2HFY18 will see the group benefitting from sharing Proton losses with Geely (which holds 49.9% of the carmaker) but we have a negative outlook for Proton in the next one year as it will have no new launches, and focuses on brand reform ahead of the Boyue launch aimed by 2019.

• The immediate goal will be to develop the long-term roadmap for Proton. The company has seen consecutive losses for at least six years; it registered a revenue of RM4.2bil and net loss of RM934.1mil in its FY17 ended March 2017.The main goals are to raise the production volume (by boosting domestic sales and begin exports to right-hand markets in SEA), and invest in narrowing the technology gap with rivals.

Source: AmInvest Research - 4 Dec 2017