Results

• Within Expectation – DRB reported core earnings of RM82.4m for 2QFY3/15 and RM166.5m for 1HFY03/15, vs. HLIB’s RM378.8m and consensus RM364.7m. We expect stronger 2HFY03/15 earnings driven by automotive.

Highlights

2QFY15 QoQ: Revenue dropped 13.4% QoQ dragged by automotive segment (lower car sales and production volume) and service segment (discontinued contribution from Uni.Asia Capital). EBIT margin weaken to 1.5%, after automotive segment recorded losses, discontinued contributions from Uni.Asia and lower contribution from Bank Muamalat (provisions). JV/Associate contribution improved from Automotive (mainly Honda) and Services . Recognised RM97.4m gain from Uni.Asia Capital disposal in 2Q15. However, DRB’s share of the disposal gain is only RM33.8m, for its effective stake of 34.7%.

2QFY15 YoY: Similarly, revenue dropped 11.6% YoY and EBIT dropped 77.3% YoY due to weaker contribution from automotive and services segments , which was partially offset by stronger Property segment earnings.

1HFY15 YoY: Core PATAMI increased marginally by 0.6% YoY to RM166.5m, due to stronger contribution of Property and Services segments as well as associates/JVs (+66.8% YoY) offsetting the weak margins of the automotive subsidiaries.

Outlook: DRB continued to embark on group restructuring exercises (Isuzu JVs) and M& A exercises (Gading Sari and Oriental Summits) as well as asset disposals (Uni.Asia) in order to extract group synergies. It is confident of earnings growth as Lotus group improved productions and increase sales volume while Proton banking on newly launched Iriz, which has only started to ramp-up production in Nov. Sales momentum of Honda, Mitsubishi and Deftech are likely to sustain into 2H15.

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 - 28 Nov 2014