Results

• Below Expectation – DRB reported core loss of RM245.9m for 4QFY17 and RM525.4m for FY17, worse than HLIB loss expectation of RM323.6m and consensus loss of RM350.6m.

Deviations

• Worse than expected loss in automotive segment.

Dividends

• None.

Highlights

• YoY : Group revenue increased by 32.2% on improved sales mix of Proton, consolidation of POSM (since 3Q17) and higher sales recognition from Property & Infra segment. Group LBIT lowered to RM148.1m (from RM213.7m) on improved sales and lower bank provisions. Subsequently DRB reported lower loss of 245.9m in 4QFY17 (vs. RM280.0m in 4QFY16).

• QoQ: Core loss worsened due to lower sales of Deftech and further weakening of margins of automotive division on higher sales and marketing costs and weaker RM.

• FY17: Core loss expanded to RM525.4m (from RM467.9m), with lower automotive sales (including Deftech) as well as lower contribution from associates/JVs.

• Comment: DRB performance was mainly dragged down by loss of Proton (including Lotus). It was reported Proton recorded losses of RM1.5bn in FY16 and RM1.0bn in FY17.

Excluding Proton, DRB would have reported profits of RM455.5m in FY16 and RM533.2m in FY17.

• With the recent Head of Agreements signed between DRB, Proton and Geely, we believe DRB would benefit

considerably from: 1. Lower loss recognition from Proton (including Lotus); 2. Lower capex commitment (cash) to Proton & Lotus; 3. Proton leveraging on Geely’s support for turnaround; 4. Receive several valuable lands and assets from Proton, including Shah Alam land of 250 acres; 5. Receive cash proceeds of RM560m from sales of Lotus; 6. Able to channel resources/focus in other investments.

• We believe the risk of HoA agreement being terminated is minimal, given the great interest of all the stakeholders to ensure Proton’s survivability. A definitive agreement will be concluded in July 2017 (7 weeks after 24 May 2017).

Risks

• Prolonged bank tightening measures on lending rules;

• Slowdown of the Malaysia economy affecting car sales;

• Global automotive supply chain disruption;

• Slow integration of Proton and Pos respectively.

Forecasts

• Unchanged.

Rating

BUY ↔

• With the emergence of Geely as strategic foreign shareholder for Proton, we can expect re-rating catalyst on DRB’s valuation.

Valuation

• Maintain BUY on DRB with unchanged TP of RM2.58 based on 20% discount to SOP, after imputing the implied value for Proton, Lotus and higher Pos valuation.

Source: Hong Leong Investment Bank Research - 31 May 2017