Results

• Below Expectations – DRB reported core losses of RM521.2m for 4QFY03/16 and losses of RM700.6m for FY03/16, wider than HLIB’s loss expectation of RM186.2m and consensus’ RM126.9m.

Deviations

• Lower than expected sales volume for automotive segment (especially Proton) and average pricing (higher discount offered to boost car sales volume and pricing pressure on manufacturing sector).

Dividends

• Proposed net single dividend of 2 sen.

Highlights

• QoQ: Revenue dropped 21.1% mainly on lower sales volume of Proton, automotive distribution and manufacturing. Continued operational losses (LBIT) at RM659.0m due to lower sales (lower economies of scale) as well as higher distributional and input costs. Excluding RM70m adjustments for Honda inventory losses (due to the previous fires at its warehouse) and Suzuki consolidation, associates and JV contributions would have come in at RM61.3m, declining by 9.0% on lower margins for automotive division.

• YoY: EBIT deteriorated on lower revenue, higher sales and distributional costs and higher input costs, while associates & JVs improved on higher Honda sales.

• YTD: Similar to quarterly performance, EBIT margin turned negative on disappointing automotive division.

• Outlook: Remains weak on subdued consumer sentiments (affecting car demand) and higher cost structures. Proton is banking on new launch of Perdana (2Q16), Persona (3Q16), Saga (4Q16) and Suzuki MPV (1Q17) to improve group performance in FY17.

Risks

• Prolonged bank tightening measures on lending rules.

• Slowdown of the Malaysian economy affecting car sales.

• Global automotive supply chain disruption.

• Slow integration of Proton and Pos.

Forecasts

• Cut earnings forecasts for FY17E to RM300.9m losses (from RM135.4m profits) and reduced FY18E to RM17.4m profits (from RM309.0m profits) respectively, factoring in lower margins for automotive division due to higher input and operational costs. Introduce FY19E at RM298.5m profits.

Rating

HOLD

• 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) Tighter financing rules; 2) Weakened consumer sentiment; 3) Weakened MYR; and 4) Intense competition from rival automotive marques.

Valuation

We maintains our HOLD recommendation with a lower TP RM0.80 (from RM1.05), after adjusting for lower automotive earnings and unchanged SOP discount rate of 35%.

Source: Hong Leong Investment Bank Research - 1 Jun 2016