Investment Highlights

• We maintain HOLD but raise our SOP-based FV to RM1.99/share (from RM1.85/share) on DRB-Hicom. FY18 core net loss of RM66mil was above expectations, beating our estimate of losses of RM516mil and consensus RM325mil. We adjust our FY19-21 earnings upwards on stronger sales for its non-auto segments and better cost management.

• In 4Q, DRB saw revenue drop 12% YoY but its net loss shrink to RM10mil from RM329mil in the previous corresponding period. It saw a core net profit of RM83mil from a net loss of RM239mil.

• Revenue dropped on much weaker Proton sales and lower recognition of its construction projects. The stronger bottom line is owed to a stronger operating line (due to lower input costs and higher other income), the partial distribution of Proton losses to Geely (from 3Q18) and stronger associate earnings.

• In FY18, DRB saw revenue improve 6% YoY and its bottom line swing to a net profit of RM499mil from a loss of RM460mil. It still registered a core net loss after accounting for exceptional items (namely the RM1.1bil grant Proton received for R&D). Core net loss shrank to RM66mil from RM352mil in the previous year.

• Revenue improved as a drop in Proton sales was mitigated by stronger topline from the services and property segments. Services benefited from the consolidation of Pos Malaysia as a subsidiary from 2H17 and a slight growth in concession earnings (from Alam Flora). Property saw a higher recognition from projects by Northern Gateway Infrastructure and Media City.

• The smaller core losses seen in FY18 were due to the sharing of Proton losses with Geely and stronger topline. We believe DRB stayed in the red due to persistent losses from Proton, a drop in the profitability of its property segment (PBT plunged 80% YoY despite the massive topline expansion) and continuing losses from its investment holding segment (which we believe holds the group’s other non-core assets; pre-tax losses here have exceeded RM200mil/year).

• The group declared a first and final dividend of 3 sen/share for FY18 vs. 1 sen/share in FY17. While its core net loss has shrunk, we believe the group still has a long way towards finding solid ground.

• The chief concern remains Proton’s recovery. DRB has not articulated its strategy for the impending Boyue SUV which will compete with options from Perodua and Honda. The Boyue will test the market with a CBU version and a localized one is eyed for 2H19.

• The share price dropped mid-May on concerns that the Geely-Proton tieup could be cancelled but rebounded after the government assured that it would not buy back Geely’s stake and that Proton now belongs to DRB. This was followed by a second decline in DRB. We believe this is rooted in concerns for Proton’s survival in the coming years without overt government support. Recall that it had RM500mil of debt as of March and future capex (of which 80% will comprise borrowings) will increase this. Proton could take up to 3-5 years to be self-sufficient.

Source: AmInvest Research - 1 Jun 2018