DRB reported core LATMI of -RM6.3m for 3QFY12/19, dragged FY12/19 to RM79.3m, as compared to HLIB’s forecast of RM185m for FY12/19. The disappointment was mainly due to weaker than expected sales and margins of automotive segment (except Proton), larger losses of PosM (weaker volume and malware attack in Oct) and deconsolidation of Alam Flora. We maintain BUY recommendation on DRB with unchanged TP: RM3.50 (based on 15% discount to SOP: RM4.13) 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 expectation. DRB reported core LATMI of -RM6.3m for 3QFY12/19, dragged FY12/19 earnings (only 9 months reporting for FY12/19 following a change in financial year end to Dec) lower to RM79.3m as compared to HLIB’s forecast of RM185m for FY12/19. This was dragged by weaker than expected sales and margins of automotive segment (except for Proton) and larger losses of PosM as well as the complete deconsolidation of Alam Flora effective Dec 2019. During the quarter, DRB recognised gain on Alam Flora disposal of RM514.7m, partially offset by impairments of RM319.8m goodwill in PosM.

QoQ/YoY. Despite the promising sales of Proton, DRB reported core LATMI of - RM6.3m (vs. PATMI RM45.6m in 2QFY12/19 and RM61.1m in 3QFY03/19), dragged by weaker than expected sales and margins of the overall automotive segment (except for Proton), enlarged loss of PosM (deteriorating traditional mail volume and malware attack on its courier system in Oct), deconsolidation of Alam Flora (in Dec) and lower contribution from property segment.

YTD. Core PATMI improved by 31.8% to RM79.3m in FY12/19, mainly driven by the successful turnaround of Proton, partially offset by widened losses from PosM, weaker overall automotive sales and margins (mainly Honda) and lower contributions from Property segment.

Proton. Proton has recently commenced its new Tg Malim production line by end 2019 and launched X70 CKD model in Feb 2020. Together with the upcoming X50 CKD model in 2H2020, Proton is targeting sales of 130k units in 2020 (30% growth YoY). We believe Proton’s strategic growth plan is very much in line with the recently announced NAP 2020 targets and road maps. Proton is expected to expand its export program in 2020 with a target of 5k units (after achieved 1k units in 2019) with its new generation models as well as enhanced existing models. Pakistan will be the first export country to commence Proton CKD program, partnering Al-Haj group, and set to start with Saga and X70 models in 2020.

PosM. PosM is expected to return back into profits following the effective postage tariff hike effective 1 Feb 2020. However, PosM’s outlook going forward remains generally challenging due to continuing contraction in conventional mail volume as well as continued competitive environment for its courier segment.

Forecast. Unchanged.

Maintain BUY, TP: RM3.50. We retain our BUY recommendation with unchanged TP: RM3.50 based on 15% discount to SOP: RM4.13. We remain positive on Proton’s outlook as it continues to enjoy strong sales growth with attractive model line-up. The car maker will start to broaden its export volume in 2020.

Source: Hong Leong Investment Bank Research - 9 Mar 2020