Results

• Within Expectation – Reported stronger core profit of RM295.7m (+41.6% yoy) for FY03/15, due to lower than expected tax expenses (RM102.9m tax write-back in 4Q15). Excluding tax write-back, core profit would be RM192.8m vs. HLIB’s RM203.1m (in line) and consensus RM272.0m (below).

Deviations

• None.

Dividends

• None.

Highlights

• 4QFY15 QoQ: Despite lower revenue by 9.0% (dragged by lower revenue recognition from Deftech and CTRM), EBIT margin improved to 2.8%, mainly on higher earnings recognition from property and infrastructure segment . JV/Associate contributions also declined 41.3% due to stiff competitions and lower margins (higher marketing and distributional costs) in automotive segment, losses in property and margin squeeze for PosM.

• 4QFY15 YoY: Similarly, revenue declined by 11.6% on lower car sales and disposal of Uni.Asia Capital (since 2Q15). EBIT margin improved on higher contribution mix from Deftech and CTRM. Lower associate and JVs contributions on disappointing PosM result in 4Q15.

• FY15 YoY: Core PATAMI (exclude EIs and deferred tax) improved by 41.6% to RM295.7m mainly due to lower tax. Excluding the tax write back of RM102.9m (4Q15), core profit stayed relatively flat at RM192.8m, in tandem with lower group EBIT margin and higher net interest expenses (partially offsets by higher contribution from associates and JVs).

• Outlook: Proton is expected to remain a drag to the group earnings in 2015, which will be offsets by stronger contribution of Honda (gaining market share), higher Lotus sales (worldwide) and higher contribution from Defense (Deftech) and Aviation (CTRM).

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

• Cut FY03/16-17 earnings by 34.1% and 24.5% respectively, after assuming lower margins due to intense marketing activities. Introduced FY03/18 earnings at RM564.3m.

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; 2) Weakening of MYR; and 3) weak consumer sentiment.

Valuation

• Maintained Buy on DRB with lower Target Price of RM2.62 (from RM2.75) based on unchanged 20% discounts to SOP.

Source: Hong Leong Investment Bank Research - 29 May 2015