Results

Within Expectation – DRB reported core earnings of RM84.1m for 1QFY03/15, which is 22.1% of HLIB’s RM381.3m and 24.7% of consensus’ RM340.1m. We expect stronger earnings in 2HFY03/15 on stronger contribution from Automotive and Services divisions.

Deviations

None.

Dividends

None.

Highlights

QoQ: Revenue improved 2.5% QoQ driven by PAC (higher recognition from property completions) and Service (Muamalat and Uni.Asia). Overall EBIT margin improved to 4.4% from 1.5% on the turnaround of Automotive (including contribution from Defense and CTRM). JV/Associate contribution improved from Automotive (strong Honda and Mitsubishi sales), which was partly offsets by weaker contribution of Service i.e. Pos Malaysia (due to lower revenue and rigid high cost structure related to staffs and transportation). Recognised RM83.1m gain from Uni.Asia Life disposal and RM190m from Johor land disposal in 4QFY14.

YoY: Revenue improved 21.9% YoY, driven by Automotive (higher car sale volume and inclusion of CTRM and Defense contracts) and Service (Muamalat, KLAS-KLB and Alam Flora). EBIT margin improved 1.1%-pt to 4.4% mainly due to high provision by Muamalat in previous years, as well as improved contributions from KLAS and Alam. Associates/JVs also improved substantially on stronger Automotive, partly offset by lower Service.

Outlook: We expect stronger earnings in 2HFY15, with the launching of Proton GSC Model – IRIZ, as well as lower losses from Lotus (banking on sales growth in key market China) and continued strong sales of Honda (Launched new model City and Jazz-including upcoming Hybrid model). 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

Unchanged.

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 unchanged Target Price of RM3.00 based on 20% discounts to SOP.

Source:Hong Leong Investment Bank Research - 29 Aug 2014