Reported core loss of RM16.0m for 1QFY19, in line with our expectation. We expect meaningful earnings recovery towards 2HFY19 when Proton launches the highly anticipated SUV model (Boyue) by end CY19. Adjust FY19 PATMI by +1.9% and FY20 PATMI by -4.4% post book-keeping and introduce FY21 PATMI at RM297m. Maintain BUY with higher TP: RM2.80 (from RM2.62), as we are positive on Geely’s commitment in turning around Proton, with operational expertise, access to technology and platform as well as market expansion into China and regional ASEAN market.

Within expectation. Reported core loss of RM16.0m for 1QFY19, against HLIB FY19 forecast profit of RM76.3m and consensus RM63.6m. We deem the result within expectation, as we expect meaningful earnings recovery towards 2HFY19 when Proton launches the highly anticipated SUV model (based on Geely Boyue) by end CY19.

QoQ. Turned to core loss of RM16.0m from breakeven level of RM0.2m in 4QFY18, mainly dragged by lower contribution from Services segment (including PosM). Automotive division recorded lower operating loss (LBIT), on higher sales volume of Proton.

YoY. Core loss reduced significantly to RM16.0m from RM172.1m (1QFY18), as partial loss in Proton now being attributed to Geely in 1QFY19, post 49.9% stake dilution in Proton to Geely (since 3QFY18).

Outlook. Proton’s turnarounds remain as the key catalyst for DRB’s earnings growth. With Geely as Proton’s shareholder and Foreign Strategic Partner, we are confident on Geely’s commitment for Proton’s turnaround. Geely has agreed to improve Proton’s operational efficiency and allow Proton to tap into its green-car technology and basic vehicle platform technologies (including Volvo). Proton will eventually leverage on Geely to expand into China market and regional ASEAN market.

Corporate exercise. As part of DRB’s ongoing restructuring exercise, DRB has proposed to enter into asset/land swap exercise with major shareholder Tan Sri Syed Mokhtar, valuing its asset/land at RM1.9bn (including cash RM289m) as well as disposal of Alam Flora to Malakoff for cash RM945m. The exercises will improve DRB’s balance sheet and allow DRB structure to be lean and remain focus.

Forecast. Adjust earnings for FY19 by +1.9% and FY20 by -4.4%, post book-keeping based on latest FY18 annual report. We introduce FY21 PATMI at RM297m.

Maintain BUY, TP: RM2.80. Following our earnings adjustments and book-keeping, we raise TP to RM2.80 (from RM2.62). We maintain BUY recommendation on DRB, as we are positive on Geely’s commitment in turning around Proton, with Proton foraying into China market as well as regional ASEAN market expansion.

Source: Hong Leong Investment Bank Research - 29 Aug 2018