Results

• Within expectations – DRB reported core profit of RM59.1m for 3QFY18, lowering 9M18 core loss to RM268.5m, relatively in line with HLIB’s expectation of core loss of RM88.8m and consensus RM293.2m.

Deviations

• None.

Dividends

• None.

Highlights

• YoY : Group revenue reduced by 23.2%, dragged by disappointing sales of Proton, consolidation of PosM. However, DRB returned to the black in 3QFY18, following the completion of Proton’s strategic foreign partnership exercise (49.9% stake dilution in heavy loss making Proton to Geely and 100% stake disposal in Lotus to Geely and Etika Strategy).

• QoQ: Similarly, DRB turned around to profit of RM59.1m from RM153.9m loss in 2QFY18, following the completion of Proton’s strategic foreign partnership exercise.

• 9M18: Core loss lowered to RM268.5m (from RM314.2m in 9M17), following the turnaround of the Group performance in 3QFY17.

• Comment: In 3QFY18, DRB has reversed the interest of RM27.8m to GOVCO’s subscribed Redeemable Convertible Cumulative Preference Shares (RCCPS) post DRB issued option to RCCPS to take over the RCCPS.

• Following the strategic entry of Geely as Proton’s shareholders, a new CEO, Li Chunrong was appointed by Geely to spearhead Proton’s restructuring exercise. Proton dealers and suppliers were brought to China to experience and understand Geely’s operation and products. Dealers are encouraged to upgrade their existing centers into 3S centers, while suppliers were asked to cut prices up to 30%.

• By 2027, Proton is looking to secure 30% market share domestically and 10% of ASEAN market. Proton aims to sell 400k units per annum by 2027, having benchmarked 200k units by 2020 and 300k units by 2023.

• 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. It is targeting 109k units in 2018.

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 higher TP of RM2.88 (from RM2.60) as we lower the holding company discount to 10% from 20% previously.

Source: Hong Leong Investment Bank Research - 1 Mar 2018