Results

• Below Expectation – DRB reported core loss of RM179.2m for 1QFY03/18 as compared to HLIB’s forecast of RM23m profit, while broadly in line with consensus RM153m loss.

Deviations

• Worse than expected sales volume of automotive division, dragged by Proton poor performance.

Dividends

• None.

Highlights

• YoY : Despite the jump of 33.4% in revenue, core loss widened by 30.5% due to lower margins of automotive division and contribution from automotive associates/JV, affected by higher COGS and operating costs on stiff competitions and RM depreciation.

• QoQ: Revenue was relatively flat, but core loss lowered by 27.1% due to improved margins of automotive division on higher contribution from Deftech and stronger RM.

• Comment: DRB continued to be dragged by the disappointing performance of Proton Group (including Lotus) in 1Q18. Proton sales was far behind its target of 120k units, affected by deteriorated consumer perception, tight bank lending guideline and stiff competitions from other marques.

• With the upcoming completion of Geely’s new equity subscription in to Proton and complete disposal of Lotus in 3QFY18, DRB is expected to revert back into positive earnings from 3QFY18 onwards, as the group only needs to recognize 50.1% of Proton’s huge financial loss and disassociate from Lotus’s loss.

• Furthermore, Proton has a better chance of turnaround, with the support of Geely as strategic shareholder. The immediate issues to be addressed include: 1) deteriorated consumer perception; 2) high cost structure; 3) low utilization rate of the plants; and 4) lack of new models line up.

• Nevertheless, associate 34% owned Honda continues to lead the foreign market segment with attractive new models (new BRV, Jazz facelift and hybrid, City facelift and hybrid, and new CRV) launched during the year.

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 Geely.

Forecasts

• Cut our forecasts for FY17 to –RM89m from +RM23m and FY18 to RM209m from RM298m in view of the worse than expected Proton performance. We introduce FY19 forecast at RM296m.

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 lower TP of RM2.15 (from RM2.26) based on 30% discount to SOP, post forecast change.

Source: Hong Leong Investment Bank Research - 28 Aug 2017