Results

• Within Expectations – DRB reported core loss of RM153.9m for 2QFY18 and RM327.5m for 1HFY18, relatively in line with HLIB’s expectation of core loss of RM88.8m and consensus RM206.8m.

Deviations

• We deem the results in line as we expect the group to turn around in subsequent quarters post the completion of partial divestment of Proton (Geely becoming 49.9% shareholder) and disposal of Lotus in 2QFY18.

Dividends

• None.

Highlights

• YoY : Group revenue increased by 26.4% on improved sales of Proton, consolidation of PosM (since 3Q17) and new sales contribution from Northern Gateway Infrastructure and Media City. However, core loss widened by 14.8% due to lower margins for automotive segment (due to RM depreciation), lower contributions from Deftech and higher earnings attributed to minority interest (PosM).

• QoQ: Core loss improved by 11.8% on higher contributions from JV/associates automotive (attributed to Honda).

• 1H18: Core loss expanded to RM327.5m (from RM264.5m), on lower JV/associates contribution and higher profit attributed to minority interest of PosM.

• Comment: In 2QFY18, DRB has recognized RM1.1bn gain from reimbursement of R&D grant, RM116.67m gain from Proton divestment, RM133.19m loss from Lotus disposal and RM155.63m loss from restructuring exercises.

• With the completion of the divestment exercises (Geely’s new equity subscription in to Proton and 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 while disassociating from Lotus’s loss.

• 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.

• Moreover, earnings contribution from CTRM is expected to expand further with the completion of capacity expansion by over 25% in FY1Q19, in order to meet the growing demand for composite component by AirBus.

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 RM2.15 based on 30% discount to SOP of RM3.08.

Source: Hong Leong Investment Bank Research - 4 Dec 2017