Investment Highlights

• We maintain HOLD and an SOP-based FV of RM1.89/share on DRB-Hicom. DRB saw its 9MFY18 core net loss widened 16% to RM451mil. This is after excluding a slew of EIs, most notable being the RM1.1bil R&D grant received by Proton and an impairment charge.

• The result was below expectations as it had exceeded our FY projection of a RM310mil loss and consensus' RM293mil. We raise our loss projections for FY18-20 by 66%-112% to account for continuing auto losses and a subdued outlook for its core segments.

• Revenue for 9MFY18 rose 13% YoY mainly on two factors: the consolidation of POS as a subsidiary (from 3QFY17) and property, asset & construction (PAC) earnings lifted from a higher recognition for projects such as the Northern Gateway Infrastructure and Media City.

• The two factors mitigated a 3% YoY decline in the topline of the automotive segment, which is still its most important and accounted for two-thirds of group revenue.

• For automotive: top-line improvements from Proton (revenue up 30% YoY) and automotive distribution (led by a 13% YoY increase in Honda volume; declines were seen for Proton, Isuzu and Mitsubishi) were softened by a drop for its automotive component unit (down 44% YoY) and lower recognition of the AV 8x8 project.

• On the group’s PBT, the consolidation of POS (raising services PBT 32% YoY) and R&D grant received by Proton in 2QFY18 (which flipped the automotive segment into a PBT of RM330mil from a loss of RM336mil previously; the unit continues to be loss-making otherwise) mitigated a drop for PAC (property, asset & construction; PBT down 74% YoY despite the spike in the topline).

• The services segment remained uncompelling with the exception of POS, which is now a 53.5% subsidiary. Banking and education revenues were lower, while concession revenue was up 3% YoY.

• We believe the group will benefit 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 major new launches and focus on brand reform ahead of the Boyue SUV launch.

• The immediate goal will be to develop the long-term roadmap for Proton. The company has seen consecutive losses for at least six years. 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 its rivals.

Source: AmInvest Research - 1 Mar 2018