Reported core PATMI of RM61.1m for 3QFY19, turning around 9MFY19 to PATMI of RM48.3m, in line with our expectation. The earnings in 9MFY19 was mainly driven by stronger earnings contribution from Deftech and Property segment as well as the completion of Proton restructuring (partial loss recognition from Proton and disposal of Lotus). We adjust lower TP: RM2.58 (from RM2.80), based on 10% discount to SOP: RM2.87, following upkeep in recent cut in TP for PosM to RM1.90. We maintain BUY on Proton as we are positive with Geely’s commitment in turning around Proton.

Within expectation. Reported 3QFY19 core PATMI of RM61.1m, turning around 9MFY19 to core PATMI of RM48.3m, against HLIB FY19 forecast profit of RM77.7m and consensus RM80.8m. We deem the result within expectation, as we expect continued profits in 4QFY19 with the full contribution of Proton X70 SUV model.

QoQ/YoY. Core PATMI expanded to RM61.1m from RM3.3m in 2QFY19 and RM31.2m in 3QFY18, mainly attributed to strong earnings recognition from Deftech on higher number of delivery for AV8s as well as stronger earnings recognition from Property segment (likely due to concession for Media City and Northern Gateway ICQS).

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. PATMI turned to black of RM48.3m, a significant improvement from the loss of RM274.5m in 9MFY18, due to higher earning recognition from Deftech and property and infra earnings as well as completion of restructuring of Proton (new JV shareholder Geely) and disposal of loss making Lotus since 3QFY18.

Outlook. Proton’s turnarounds remain as the key catalyst for DRB’s earnings growth. The successful launch of the new X70 SUV 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. In the meantime, Proton has introduced the facelift Iriz and Persona to keep the market excited. 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: RM2.58. We lower or TP to RM2.58 (based on 10% discount to SOP: RM2.87), following the up-keeping of SOP with the recent cut in target price for Pos Malaysia to RM1.90. However, we still maintain our 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 - 1 Mar 2019