Results

• Within Expectation – DRB reported core loss of RM111.8m for 2QFY03/17 and RM249.2m for 1HFY03/17, in line with HLIB loss expectation of RM323.6m for FY17E, but below consensus (loss of RM150.8m).

Deviations

• None.

Dividends

• None.

Highlights

• YoY: Group revenue dropped by 18.7%, dragged by automotive segment on lower sales volume (for Proton and Deftech). The lower revenue and higher input costs (RM depreciation and sales and distributional expenditures) have resulted in operational loss (LBIT) of RM49.0m (from profit of RM51.3m). JVs/Associates contribution was also affected by lower margins of automotive segment. Core loss expanded to RM111.8m from RM7.0m.
• QoQ: With higher revenue of 5.7% (on improved Proton sales), DRB managed to halved LBIT to RM49.0m. However, JVs/Associates contribution declined by 29.4% on lower contribution from automotive segment (lower margins) and service segment (seasonally lower courier/mail/parcel volume). Core loss declined by 18.7%.
• YTD: Core loss expanded to RM249.2m (from RM91.6m), on lower revenue (dragged by Proton and Deftech), while JVs/Associates contribution remained stable.
• Comment: Under government’s initiative and support, Proton is in the midst of determining a strategic foreign partner as a long term solution to improve its branding, technology and cost structures. Proton has already shortlisted 3 foreign partners (media reported to be Peugeot, Renault and Suzuki) as potential candidates. Final decision is expected to be announced by end 1QCY17.
• On the other hand, DRB has consolidated PosM into its balance post the completion of PosM acquiring KLAS/KLB in Sep 2016. DRB has recognized loss of RM130.2m from re- measurement of its initial investment into PosM.
• Outlook: Despite on-going weak consumer sentiment in 2HFY03/17, Proton is expected to improve sales volume from the new launches which will support DRB’s turnaround (from losses).

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

• Unchanged.

Rating

BUY ↑

• With the potential M&A exercise for Proton (emergence of strategic foreign shareholder) on the card, we can expect re- rating catalyst on DRB’s valuation. DRB is expected to make the final decision by end 1QCY17.

Valuation

• Given the recent plunge in share price, we upgrade to BUY with unchanged Target Price of RM1.35 based on 20% discount to SOP.

Source: Hong Leong Investment Bank Research - 30 Nov 2016