Reported weaker than expected core PATMI of RM53.7m for 1QFY12/19 vs. +RM208.4m in 4QFY03/19 (QoQ) and -RM16.0m in 1QFY03/19 (YoY), mainly due to lower than anticipated profitability for all segments – 1) Auto; 2) Services; and 3) Property. Nevertheless, we take comfort that Proton remains profitable in the quarter, and we expect stronger earnings in coming quarters. We adjust lower TP: RM3.50 (from RM4.15), based on higher 15% discount (from 10%) to revised lower SOP: RM4.13 (from RM4.61), following change of financial year end to Dec (from Mar) and earnings revision. We still retain BUY recommendation on DRB as we are positive with Proton’s growth outlook to benefit DRB on its equity stake as well as its automotive parts components segment.

Below expectations. DRB continued to report positive core PATMI for third consecutive quarter at RM53.7m for 1QFY12/19 (change of financial year end to Dec). However, we deemed the positive earnings below our expectations and consensus, due to lower-than-anticipated profitability across all segments: 1) Auto (Proton and Deftech); 2) Services (Muamalat and Alam Flora); and 3) Property, Asset Management and Construction (PAC).

QoQ. Core PATMI declined to RM53.7m (1QFY12/19) from RM208.4m (4QFY03/19), dragged by lower contribution from Auto and PAC segments. Proton margin declined on writeback of provisions in previous quarter, combined with provisions in the current quarter. Nevertheless, we take comfort that Proton remained profitable during the quarter. Deftech’s contribution also lowered QoQ due to lower AV8 contract recognition during the quarter, and management expects the recognition to accelerate in coming quarters to strengthen earnings. The lower profitability of PAC QoQ was due to construction profits for completion of Media City and Northern ICQS in previous quarter. We also understand that Services segment only improved marginally QoQ despite the significant improvement in PosM results, was due to seasonally lower contribution from both Bank Muamalat and Alam Flora, which are expected to normalise in coming quarters.

YoY. Core PATMI restored to the black of RM53.7m in 1QFY12/19 (from loss of RM16.0m in 1QFY03/12), driven mainly by the turnaround of Proton, which was partially offset by lower contribution of Deftech (Auto segment), overall Services segment and overall PAC segment.

Outlook. Despite the relatively low core PATMI in the quarter, we expect DRB’s upcoming normalized earnings would be more reflective of DRB’s fundamental performance. Proton earnings are expected to improve further, following higher sales volume on its attractive new models in the pipe line as well as commencement of its export plan.

Forecast. Following weaker than expected 1QFY2/19 results and the change of FYE to Dec 2019, we have adjusted our earnings accordingly for FY12/19 (9 months only) to RM 186.4m and FY12/20 to RM478.0m and introduce FY12/21 at RM530.9m (as compare to previously FY03/20 at RM580.8m and FY03/21 at RM700.9m).

Maintain BUY, TP: RM3.50. We retain our BUY recommendation with lower TP: RM3.50 (from RM4.15), as we raised our discount rate to 15% (from 10%) to our revised SOP: RM4.13 (from RM4.61). We remain positive on Proton’s outlook as it continues to enjoy strong sales growth with attractive model line-ups. Proton has remained profitable for second consecutive quarter into 1QFY12/19.

Source: Hong Leong Investment Bank Research - 26 Aug 2019