Reported core PATMI of RM3.3m for 2QFY19, lowering 6MFY19 LATMI to RM12.8m, in line with our expectation. We expect meaningful earnings recovery towards 2HFY19 when Proton launches the highly anticipated SUV model (Boyue) by end CY18. Maintain BUY with unchanged TP: RM2.80 (10% discount to SOP: RM3.12), as we are positive on with the strong 12k units of pre-launch booking of X70. Geely is committed 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 2QFY19 core PATMI of RM3.3m, lowering 6MFY19 core LATMI to RM12.8m, against HLIB FY19 forecast profit of RM77.7m and consensus RM55.6m. We deem the result within expectation, as we expect meaningful earnings recovery towards 2HFY19 when Proton launches the highly anticipated X70 SUV model (based on Geely Boyue) by end CY18. The model has received strong 12k units of pre-launch booking by end Nov 2018.

QoQ. Turned to minor core PATMI of RM3.3m in 2QFY19 from core loss of RM16.0m in 1QFY19, mainly driven by improved group automotive sales volume in lieu of the GST “zerorisation” period in Jul-Aug, being partially offset by the loss in 53.5% owned PosM.

YoY. Similarly, PATMI turned to black from core loss of RM133.6m in 2QFY18, due to improved group automotive sales volume during the quarter and partial loss in Proton now being attributed to Geely, post 49.9% stake dilution in Proton to Geely (since 3QFY18).

YTD. DRB still reported a small core LATMI of RM12.8m, a significant improvement from RM305.7m in 6MFY18, due to improved group automotive sales volume during 2QFY19 and partial loss in Proton now being attributed to Geely, 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. The upcoming new X70 SUV model has received a strong pre-launch booking of 12k units by end Nov 2018. Proton is confident the new model is a good starting point, leading to Proton’s turnaround. Proton is expected to introduce another 2 Geely based models namely SX11 (a smaller SUV model known as Geely Bin Yue) and Geely VF11 (a MPV model) within the next 2 years in order to push for stronger sales volume. With Geely as Proton’s shareholder and Foreign Strategic Partner, we are confident on Geely’s commitment for Proton’s turnaround. Proton will eventually leverage on Geely to expand into China market and regional ASEAN market.

Corporate exercise. DRB has received shareholders’ approval for the asset/land swap exercise with major shareholder Tan Sri Syed Mokhtar, valuing its asset/land at RM1.9bn (including cash RM289m) as well as the 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. Unchanged.

Maintain BUY, TP: RM2.80. Maintain BUY recommendation with unchanged TP: RM2.80 (based on 10% discount to SOP: RM3.12). 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 - 30 Nov 2018