Results

Below Expectation - Reported 3QFY3/14 core profit at RM29.5m and 9MFY3/14 core earnings at RM213.5m, as compared to HLIB’s RM420.3m (50.8%) and consensus RM349.9m (61.0%).

Deviations

Lower than expected sales volume and higher than expected selling and distribution expenses.

Dividends

Declared single tiered interim dividend of 1.5 sen.

Highlights

3Q14 revenue dropped by 13.1% qoq mainly due to lower group automotive sales volume (especially Proton which registered -29.0% qoq), partly offset by higher contribution from AV8 defense contracts as well as services segment.

Overall Group EBIT margin deteriorated to +2.3% in 2Q14 (vs. +6.1% in 2Q14 and -0.9% in 3Q13), from lower automotive volume sales and higher selling and distributional expenses.

Furthermore, associate/JV contribution dropped 24.8% qoq, mainly dragged by competitions and aggressive promotional campaigns for JVs Honda, Isuzu, Suzuki, Mitsubishi etc. Pos Malaysia also registered lower earnings at RM6.7m in 3Q14 due to higher operating costs.

In 3Q14, the group completed the acquisition of CTRM (Composites Technology Research Malaysia) and KLB (Konsortium Logistic). The group recognized a gain of RM111.68m, as it determined provisionally the fair value of CTRM’s assets, liabilities and contingent liabilities.

DRB’s 51% owned Uni.Asia Corp has submitted application to Bank Negara (BNM) for the disposal of 68.1% stake in Uni.Asia General Insurance for RM374.5m. BNM has no objection on the disposal of Uni.Asia Life for RM518m.

DRB Group continued its group restructuring effort and entering into its second phase, which is targeting market expansion/growth in 2014. Proton is banking on the upcoming launch GSC (Global Small Car) by April 2014.

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 cut FY03/14-16 earnings by 29.6%, 6.8% and 4.4% respectively, accounting for lower car sales volume and higher operating cost.

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’s MoD contract of RM7.55bn over 7 years; and 6) Synergy of POS with DRB’s other business units.

Negatives – 1) Banks tighten financing rules; and 2) Weakening of MYR.

Valuation

Maintained Buy on DRB with lower Target Price of RM3.30 (from RM3.38) based on 20% discounts to SOP.

Source: Hong Leong Investment Bank Research - 28 Feb 2014