Our meeting with DRB has re-affirmed our positive view on DRB’s turnaround. Proton registered its first ever quarterly profit in 4QFY19 (since FY11) due to cost-cutting measures, improved operation efficiency, higher Proton sales and new X70 contributions. We expect stronger Proton’s contribution in upcoming quarters, given the continued strong Proton sales volume on the back of attractive new model line-ups. DRB’s 53.5% PosM will be reporting improved bottomline in upcoming quarters (post disappointing 4QFY19, dragged by various one-offs) while potentially benefiting from MCMC’s review on stamp prices. Furthermore, DRB has large undeveloped landbanks with combined market value of RM6.5bn (RM3.35/share). We reiterate our BUY recommendation with higher TP: RM4.15 (from RM3.03) based on 10% discount to SOP: RM4.61, following revision on our SOP valuation method.

Proton turnaround. DRB management has confirmed that Proton has turned profitable in 4QFY19, driven by; 1) on-going cost cutting measures; 2) improvement in operation efficiencies (management estimated an improvement of c.15%); 3) higher Proton sales volume at 18.3k units; and 4) full quarter contribution of X70. Based on our back of envelop calculation, we estimated that Proton registered an encouraging profit at least c. RM100m (reported revenue of RM1.3bn) in 4QFY19.

Stronger Proton in upcoming quarters. We expect stronger contribution from Proton in the upcoming quarter, given Proton sales reached quarterly high of 25.3k units in 1QFY20 (or 1QFY19, changed FYE to Dec). Apart from continued strong X70 demand (no issue with APs), sales growth was also driven by new facelifts for Iriz, Persona and Exora, launched in Apr 2019. We anticipate Proton to continue record new highs in 2019-2020, given its attractive new model line-ups, including new X70 CKD and Saga facelift by end-2019 and X50 in mid-2020. Management indicated Proton will prioritise domestic market first before exploring export markets.

PosM. 53.5% owned PosM has reported loss of RM141m in 4QFY19, dragged DRB’s bottomline in 4QFY19. The quarter result was mainly affected by several one off items including: 1) RM40m impairment on goodwills; 2) RM63m provision for maintenance for aircraft re-deliveries; 3) RM31m staff cost adjustments related to backdated Collective Agreement with the staff union; and 4) 3-8% increase in terminal due. Without these items in upcoming quarters, PosM is likely to register lower losses. Moreover, PosM is in active discussion with regulator MCMC for potential stamp tariff hike in 2019/2020, which was last hiked in 2010.

Property. Management clarified that margin improvements in 3QFY19 was due to construction profit for the completion of phase 1 of 100% owned Northern Gateway Infrastructure (NGI) and 4QFY19 on the completion of phase 1 of 51% owned Media City (MC). Earnings for segment may remain strong with the upcoming completion of phase 2 NGI and MC in 2019 and 2020, before tapering down to concession profits.

Hidden land value. The proposed property/asset/land swap exercise with major shareholder Tan Sri Syed Mokhtar for a 1,243.45 acres of freehold land in Johor (valued at RM1.6bn) and RM288.7m cash, is expected to complete by early 2020, in which DRB will recognise a gain of RM849.4m. Moreover, DRB also has an existing 600 acres landbank for industrial development and 860 acres for mixed development. DRB will also subsequently take over the 250 acres landbank of Proton’s Shah Alam plant by 2022. The combined market value of these landbanks amounts to RM6.5bn (RM3.35/share).

Dividend. DRB has recently proposed dividend of 3sen/share (pending AGM), indicating its improving financial positions due to improved Proton’s financial performance as well as the group’s ongoing restructuring effort.

Forecast. We maintain our earnings forecast for FY20-21, pending the availability of annual report FY03/20. We note that our earnings forecasts are higher than consensus.

Maintain BUY with higher TP: RM4.15 (from RM3.03) based on 10% discount to SOP: RM4.61, as we revised our SOP valuation method to include Deftech, CTRM and higher valuation for property segment. We have yet to include the whole valuation for the group’s large tracts of landbanks (including Shah Alam) worth RM6.5bn (RM3.35/share) based on current market value. We expect increasing investor confidence towards DRB group with the continued momentum in Proton’s turnaround and improving sales volume.

Source: Hong Leong Investment Bank Research - 24 Jul 2019