• Limited downside in anticipation of improving results in FY17 -19, undemanding valuations and potential entry of a strategic foreign partner. DRB’s share prices hit a 52-week high of RM1.55 (29 Sep) following the RM1.5bn government’s soft loan announcement to recapitalize Proton for transformation and restructuring effort. Proton has shortlisted five candidates (i.e. Volkswagen AG, Suzuki Motor, Renault SA, PSA Group & Geely) as its potential strategic partner. To recap, Proton has been a drag to DRB’s performance for the past years, on heavy losses of RM462m in FY14, RM635m in FY15, RM1,456m in FY16 and RM244m in 1QFY17, due to poor car sales volume amid subdued consumer sentiments.

• Yesterday, DRB’s share prices gained 3 sen to close at RM1.23 after sliding 21% from RM1.55 (29 Sep) following a report from the Edge Weekly that DRB has finally shortlisted 3 companies in its search for a foreign strategic partner for Proton: Groupe PSA (maker of Peugeot and Citroen cars), Renault SA and China's Geely Automobile Holdings Ltd (final outocme to be known before June 2017).

• Currently, DRB is trading at undemanding valuation at 0.37x P/B, which is 35% lower than its 10-year historical average (0.57x). Overall, DRB’s core PATAMI is expected to leapfrog to RM298m in FY19 from a loss of RM451m in FY16, premised on: (1) the potential entry of a strategic foreign partner; (2) steady earnings from the RM7.55bn AV8 contract; (3) the ongoing plans to dispose of non-core assets to relieve the balance sheet; and (4) the disposal of KLAS as part of its restructuring involving POS Malaysia, which is poised to be a complete player in the logistics supply chain.

• Potential downtrend reversal from grossly oversold levels amid hammer candlestick pattern. We believe DRB’s share prices appear to be at the tail end of its short term downward consolidation, following the formation of hammer candlestick and upticks in indicators.? A decisive close above immediate resistance at RM1. 27 (50-h SMA) will spur prices higher to RM1.36 (23.6% FR) before reaching our LT objective at RM1.44 (25 Oct high). Supports are situated at RM1.19 and RM1.16 (50% FR). Cut loss at RM1.15

Source: Hong Leong Investment Bank Research - 8 Nov 2016