Results

Below - Reported 1QFY3/14 core earnings of RM58.7m, which is only 12.3% of HLIB’s FY14 forecasted RM476.8m and 13.3% of consensus’s RM441.2m. We expect stronger earnings for the remaining financial year on stronger automotive sales especially Proton.

Deviations

Higher than expected operational cost for automotive segment.

Dividends

None.

Highlights

1Q14 revenue dropped 9.1% qoq and 11.8% yoy mainly due to weak automotive sales in the quarter as consumer withheld from buying cars in anticipation of lower car prices during the election month.

Automotive sales has rebounded strongly since end June as DRB group reported record monthly sales in July for Proton (16.6k units) as well as Honda (6.0k units). Management expects robust sales in 2H13 for Proton’s Saga SV and newly launched Suprima S (expecting 1k units/month), while Honda gained traction from Jazz CKD. Mitsubishi is expected to launch Attrage (B-Segment) in Sept and introducing ASX CKD (SUV) in 2014.

DRB group continues its restructuring plan and wishes to become Syariah-compliant investment after the complete disposal of Uni.Asia insurance. DRB is seeking MOF approval to sell its Uni.Asia Assurance for RM518m.

However, we expect DRB to be affected by the weaker MYR due to higher operational cost and debt servicing cost, as well as higher translation losses from Lotus.

Net gearing remained stable at 46.1% in 1Q14. We expect net gearing level to trend down further, as DRB pair down its debt from streamlining its operation.

Risks

• Slowdown of Malaysia economy affecting car sales.
• Global automotive supply chain disruption.
• Slow integration of Proton and Pos.

Forecasts

Cut FY14 earnings by 13.3% and FY15 by 16.5% in anticipation of lower margins due to weakened MYR and potential slower sales on weak consumer sentiment. Introducing FY16 earnings at RM720m.

Rating

BUY

Positives –

• Acquiring and restructuring of Proton, to turn DRB into a major integrated automotive player in the region.
• Partnering VW group to set up regional hub in Malaysia.
• Honda Malaysia to set up regional hub for Hybrid car.
• Severely undervalued counter.
• Deftech awards of RM7.55bn over 7 years.
• Synergy between POS and DRB’s other business units.

Negatives –

• Bank tightening financing measures.
• Weakening of MYR.

Valuation

Maintained Buy on DRB with lower Target Price of RM3.14 (from RM3.36) based on 20% discounts to SOP.

Source: Hong Leong Investment Bank Research - 30 Aug 2013