Results

• Below Expectation – DRB reported core losses of RM71.4m for 1QFY03/16, behind HLIB’s profit expectation of RM308m and consensus’ RM330.7m for FY03/16.

Deviations

• Lower than expected sales volume (Proton and automotive parts and components) and average pricing (higher discount offers to boost car sales volume and pricing pressure on manufacturing sector).

Dividends

• None.

Highlights

• QoQ: Revenue dropped 8.1% QoQ mainly affected by stiff market competition and weakened consumer sentiment post GST implementation. Automotive segment was dragged down by lower sales volume (Proton car sales, automotive assembly-HAMM and autopart- component manufacturing) and lower average sales price, resulting in EBIT losses of RM47.4m. Despite stronger contribution +101.8% qoq from associates/JV (driven by automotive segment), DRB recorded core losses of RM71.4m for the quarter, dragged by high finance costs.

• YoY: Similarly, the poor performance was mainly due to significant drop in automotive subsidiaries (especially Proton) which resulted in negative impact on the overall value chain of the automotive industry. Furthermore, 1QFY15 result included Uni.Asia contribution, which was disposed in 2QFY15.

• Outlook: Sales volume has seen improvements in latest months, while manufacturing volume are expected to resume in 2HCY15, after de-stocking exercise in 1HCY15. Proton is banking on its upcoming collaboration with Suzuki for new model development and market expansion by 2016. The upcoming models due for replacement include Saga, Persona and Perdana (based on Honda Accord platform), which may excite the market by end 2015.

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 earnings for FY16-18 by 42.6%, 22.9% and 17.5% respectively after accounting for lower sales volume and lower average sales price.

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) Deftech’s MoD contract of RM7.55bn over 7 years; and 5) Synergy of POS with DRB’s other business units.

Negatives

• 1) Banks tighten financing rules; 2) Weakened consumer sentiment; 3) Weakening of MYR; and 4) Intense competition from rival automotive marques.

Valuation

• Maintained Buy on DRB with lower Target Price of RM1.72 (from RM2.62) based on 20% discounts to SOP.

Source: Hong Leong Investment Bank Research - 28 Aug 2015