Results

Below Expectation – DRB reported core earnings of RM26.8m for 4QFY3/14 and RM208.9m for FY03/14, vs. HLIB’s RM296.1m and consensus RM303.5m.

Deviations

Higher than expected selling and distribution expenses.

Dividends

Declared single tiered interim dividend of 4.5 sen. Total net dividend for FY03/14 was 6.0sen.

Highlights

4QFY14 QoQ: Revenue improved 9.1% QoQ driven by automotive segment (higher car sales volume) and service segment (Alam Flora and KLAS’s acquisition of Konsortium Logistic). EBIT margin weaken to 1.5% mainly due to higher automotive selling and distribution expense and lower income from Bank Muamalat. JV/Associate contribution improved from Automotive (strong Honda sales and Services (Pos Malaysia). Recognised RM83.1m gain from Uni.Asia Life disposal and RM190m from Johor land disposal in 4QFY14 and RM111.7m negative goodwill gain on CTRM acquisition in 3QFY14.

4QFY14 YoY: Revenue improved 8.1% YoY attributed to automotive (higher car production and Deftech recognition). However, it is not meaningful to compare 4QFY13 earnings due to accounting adjustments in 4QFY13 for the full year FY13.

FY14 YoY: Core PATAMI dropped to RM208.9m (-25.3% yoy), attributed to weak automotive (higher selling and distributional cost) and service division (Muamalat).

Outlook: Entering into second phase of restructuring, DRB is targeting growth in FY15 (previous two years was business consolidation), banking on Proton GSC model (Global Small Car) by 2HFY15, as well as Honda expansion and VW CKD manufacturing for regional export. The disposal of Uni.Asia General for RM374.5m is expected to complete in FY15.

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 FY03/15-16 earnings by 25.0% and 23.6% respectively, accounting for lower car sales volume and higher operating cost, lower contribution from Bank Muamalat and discontinued income from Uni.Asia Insurance. Introduced FY03/17 earnings at RM630m.

Rating

BUY

Positives – 1) Restructuring of Proton and Lotus; 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 RM3.00 (from RM3.30) based on 20% discounts to SOP

Source: Hong Leong Investment Bank Research - 30 May 2014