Results

• Within Expectation – DRB reported core loss of RM137.4m for 1QFY03/17 in line with HLIB’s loss expectation of RM301.3m for FY17, but below consensus RM54.9m.

Deviations

• None.

Dividends

• None.

Highlights

• YoY: Group revenue dropped by 15.2%, being dragged by automotive segment (i.e. Proton Group), mainly affected by on-going stiff market competition and weakened consumer sentiment. 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 Group operational loss (LBIT) of RM103.8m. JVs/Associates contribution was relatively stable, on sustained sales of Honda, Isuzu and Mitsubishi. Core loss expanded by 62.4%.

• QoQ: Despite revenue fell by 5%, LBIT improved by 49.3%. JVs/Associates contribution also improved by 57.9% on stronger sales volume of Honda and Isuzu. Core loss declined by 49.3%.

• Comment: Proton’s poor performance continues to drag down DRB. With new RM1.5bn life-line injection (RCCPS) into Proton by Gov, Proton has solved immediate cash flow issue (payment to vendors) and proceeds with the launch of new models – Perdana, Persona, Saga and Ertiqa in 2H16. However, Proton still needs a strategic foreign partner as a long term solution to enhance its technology and cost structures. On the other hand, shareholders have approved the injection of KLAS-KLB into POS (from DRB), which will improve integration and synergies within the group.

• Outlook: Despite on-going weak consumer sentiment in 2H16, Proton is expected to improve sales volume from the new launches and support DRB’s turnaround (from losses).

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

• Loss for FY17 is tweaked higher by 7.4% and earnings for FY18-19 are raised by 43.8% (low base) and 0.4%.

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

Maintained HOLD on DRB with higher Target Price of RM1.35 (from RM0.85) based on lower discount to SOP (20%) given the expected recovery of Proton sales volume and high possibility of securing a foreign auto partner.

Source: Hong Leong Investment Bank Research - 1 Sep 2016