Results

In Line - Reported 2QFY3/14 core profit of RM153.9m, pulled up 1HFY3/14 earnings to RM184.1m, which we deemed in line with HLIB’s RM413.6m (44.5%), and above consensus RM349.1m (52.7%). We expect stronger earnings in 2H14 from higher car sales volume e.g. Proton.

Deviations

None.

Dividends

None.

Highlights

2Q14 revenue increased 3.2% yoy, on the back of higher contribution from automotive distribution division, as Proton registered sales volume growth of 20.0% yoy (successful launch of Saga SV) and Audi +135% yoy, as well as revenue recognition from AV8 contract.

Overall Group EBIT margin improved further in 2Q14, from improvement in automotive division (partly offset by the lower performance of PAC and Service divisions), from the growth of automotive sales volume (better efficiency and economy of scale).

On the other hand, associate/JV contribution dropped 18.4% yoy, mainly dragged by competitions and aggressive promotional campaigns for JVs Honda, Isuzu, Suzuki, Mitsubishi etc. Pos Malaysia continued to register strong earnings growth in 2Q14, on the back of higher volumes and efficiency (economy of scales).

Net gearing improved to 36.2% in 2Q14 from 46.1% in 1Q14, as DRB group turned around Proton, extract internal group synergy and sale of non-core assets.

DRB is in the midst of selling in Uni.Asia Life for RM518m, while its wholly owned KLAS is acquiring 61.6% stake in Konsortium Logistics for RM241m which will still net RM277 inflow and further improve gearing.

Risks

• Prolonged bank tightening measures on lending rules.
• Slowdown of Malaysia economy affecting car sales.
• Global automotive supply chain disruption.
• Slow integration of Proton and Pos.

Forecasts

We have fine-tuned FY03/14-16 earnings, by +1.4%, +2.4% and +3.4% respectively.

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’s MoD contract of RM7.55bn over 7 years.
• Synergy of POS with DRB’s other business units.

Negatives –

• Bank tightening financing measures.
• Weakening of MYR.

Valuation

Maintained Buy on DRB with higher Target Price of RM3.33 (from RM3.14) based on 20% discounts to SOP.

Source: Hong Leong Investment Bank Research - 29 Nov 2013