HIghlights/Comments

The recent 2QFY03/14 result has beat market expectations with strong earnings contribution from automotive subsidiaries, an encouraging signs for potential turnaround of wholly owned Proton and Lotus.

Besides ~RM10m contribution from AV8 contracts, we reckon the strong earnings was attributed by the strong sales volume of Proton and controlled losses on Lotus.

Proton sales jumped after the successful launch of Saga SV (priced at RM33.4k). We understand that the low pricing was due to successful cost cutting and efficiency improvement measures by Proton-DRB. The recently launched Persona SV (price starting from RM44.9k) and upcoming GSC model in 1H14 are expected to continue drive Proton growth in 2014.

We remained positive of DRB group restructuring efforts, after witnessing the growth in Proton sales, improved earnings, and the continued disposal of non-core assets, as well as recent inclusion into Shariah Compliant list.

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

Unchanged.

Rating

BUY

Positives – 1) Acquiring and restructuring of Proton, to turn DRB into a major integrated automotive player in the region; 2) Partnering VW group to set up regional hub in Malaysia; 3) Honda Malaysia to set up regional hub for Hybrid car; 4) Severely undervalued counter; 5) Deftech awards of RM7.55bn over 7 years; and 6) Synergy of POS with DRB’s other business units.

Negatives – 1) Bank tightening financing measures; and 2) Weakening of MYR.

Valuation

Reiterate Buy on DRB with unchanged Target Price of RM3.33 based on 20% discounts to SOP.

Source:Hong Leong Investment Bank Research- 10 Dec 2013