- We maintain BUY on DRB-Hicom Bhd, with a fair value of RM3.65/share – a 15% discount to our SOP value of RM4.31/share.

- DRB-Hicom’s 1QFY14 result disappointed with a core net loss of RM2.3mil, vis-à-vis the consensus forecast of a fullyear net profit of RM441mil (Bloomberg) on lower vehicle sales and services performance.

- However, we are keeping our numbers for now, on expectations of an improved performance from the recent and impending launches of new cars. Revenue accounted for 22% of our projected numbers and 19% of consensus.

- According to DRB-Hicom, the effective tax rate is at 54.4%, “mainly due to profits of certain companies which for income tax purposes cannot be set-off against losses incurred by other companies and certain expenses that were not deductible for tax purposes.”

- A 25% tax rate would have resulted in a net core profit of RM26mil – representing 6% of our and consensus earnings forecasts.

- Group revenue fell 12% YoY and 9% QoQ due to fewer vehicle sales amid unfavourable market sentiment during the quarter. Automotive revenue fell 16% YoY and 10% QoQ to RM2.33bil.

- DRB-Hicom said the anticipation of reduced vehicle prices contributed to the overall drop in automotive sales and it expects sales to improve on the back of the introduction of the Saga SV in mid-June 2013 and the Suprima S recently.

- Group EBIT (after accounting for unallocated expenses) fell by 72% QoQ to RM104mil on declines in all segments. EBIT margin, while flat QoQ, dipped nearly 8ppts YoY to 3.4%.

- Positively, the automotive segment result improved by 81% YoY to RM80mil. Overall, the group operating profit (before unallocated expenses of RM8.8mil) rose 1.8% YoY, but fell sharply by 66% QoQ.

- DRB-Hicom’s results would continue to be volatile until it firms up its RM7.5bil armoured-wheeled vehicle contract with the government.

- Other catalysts include a steady pipeline of new model launches, including those for Lotus, as well as confirmation of its proposed collaboration with Honda.

Source: AmeSecurities