DRB reported core LATMI of -RM67.9m for 1QFY20 (within our expectation, but below consensus), dragged by overall weaker group sales following the spread of Covid-19 and implementation of MCO in mid-Mar 2020, as well as disposal of Alam Flora effective Dec 2019. We believe DRB is in good position to leverage on government’s implementation of SST exemption for passenger cars from 15 Jun to 31 Dec 2020. We maintain BUY recommendation on DRB with higher TP: RM2.75, based on lower 25% (from 30%) discount to SOP: RM3.65 as we are positive with Proton’s growth outlook to benefit DRB via its equity stake.

Within expectation. DRB reported core LATMI -RM67.9m for 1QFY20 (vs. 3QFY12/19: LATMI -RM9.7m; and 4QFY03/19: PATMI RM148.4m). The result was mainly dragged by the spread of Covid-19 and implementation of MCO during the quarter. We deem the result within our expectation (but below consensus) as we expect recovery in group sales in view of implementation of SST exemption for passenger cars and PENJANA measures in 2HFY20.

QoQ. DRB reported widened core LATMI -RM67.9m in 1QFY20 as compared to LATMI -RM9.7m in 3QFY12/19, mainly dragged by automotive segment on lower overall group sales volume and margins, affected by Covid-19 and implementation of MCO and deconsolidation of Alam Flora (in Dec 2019). Nevertheless, QoQ saw higher contribution from property segment as well as lower losses from PosM, following effective postal rate hike in Feb 2020.

YoY. Similarly, results turned to losses from core PATMI RM148.4m in 4QFY03/19, dragged by weaker overall automotive sales and margins (mainly Honda), disposal of Alam Flora and lower contributions from Property segment (completion of phase 1 of 51% owned Media City in previous quarter).

Automotive: DRB is expected to report higher losses in upcoming 2QFY20, before recovering in 2HFY20, following governments’ introduction of SST exemptions from 15 Jun to 31 Dec 2020 and PENJANA measures for 2HFY20. We expect strong rebound for DRB’s automotive segment (especially Audi models, Honda models and Proton X70). Upcoming exciting models for the group include new Proton X50, new Honda City, new Honda Jazz, facelift Honda CR-V, new Mitsubishi Xpander and new VW Tiguan Allspace in 2HFY20. However, Deftech and CTRM may remain affected by the government’s cut in defence budget and global aviation crisis.

Services: While Pos Malaysia will benefit from increasing courier volume and higher postal rate, the subsidiary is likely to see accelerated decline in conventional postal volume (cost cutting measures by corporate clients) and deterioration of aviation segment (provide MRO, aircraft handling and food catering). Bank Muamalat is implementing various cost cutting measures and expanding its services and revenue, targeting earnings growth for the year despite Covid-19 impact.

Property: Result is likely to sustain from the commencement of concession earnings for Bukit Kayu Hitam ICQS and Media City.

Forecast. Raised FY20 and FY21 earnings by 17.3% (amid a low base) and 3.0% respectively. Introduce FY22 earnings at RM654m.

Maintain BUY, TP: RM2.75. We retain our BUY recommendation with higher TP: RM2.75 (from RM2.32) based on lower 25% (from 30%) discount to SOP: RM3.65. We remain positive on Proton’s outlook as it continues to enjoy strong sales growth with attractive model line-up

Source: Hong Leong Investment Bank Research - 2 Jul 2020