Period  2Q15/1H15

Actual vs. Expectations 1H15 reported PATAMI of RM200.9m (+36% YoY) which came in within expectations, at 55% of our, and consensus’, full-year estimates. However, excluding gains from the disposal of Uni Asia General Insurance of RM97.5m, 1H15 core PATAMI of RM104m (-30% YoY) came in below expectations at 28% and 33% of our, and consensus’, full-year net profit forecasts, respectively. The negative variance from our forecast is mainly due to higherthan-expected losses and lower-than-expected volume sales at the automotive division.

Dividends  No dividend was declared in this quarter.

Key Result Highlights QoQ, 2Q15 revenue fell 13% to RM3.2b due to lower contribution from automotive (-12% QoQ) and services divisions (-23% QoQ). Automotive revenue fell due to lower volume sales across the board; from Proton (-9% QoQ), Audi (-17% QoQ) and Suzuki (-18% QoQ). 34%-owned Honda too shows a 9% QoQ decline in unit sales. Lower contribution from services was due to de-consolidation arising from the disposal of the general insurance. Stripping out a one-off RM97m gain from disposal of its insurance arm, 2Q15 register a loss of RM4.4m dragged down by higher effective tax rate, higher finance costs and as well as losses in the automotive division.

 YTD, 1H15 core net profit came in at RM103.5m (-30% YoY) due to contributions from 34%-owned Honda, inclusion of Composites Technology Research SB (CTRM), higher progress billings of AV8 project and better performances in the property segment but dragged down by automotive losses in 2Q15. Proton continued to disappoint with a negative sales growth of 21% bringing total sale units to 58k in 1H15. Solid Honda sales (+67% y-oy) boost associate contributions by >100% y-o-y.

Outlook  Earnings contributions from its RM7.55b AV8X8 contract will start from FY14 onwards while the property division is expected to contribute positively as the group plans to launch property development projects with a total GDV of RM13.3b in 2013-15. Assembly volumes for Volkswagen vehicles should also gather pace. Additionally, there are gains of RM89m from the Johor lands disposal; expected to be reflected in subsequent quarters. However, contribution from services segment could shrink after the sale of Hicom Power.

Change to Forecasts We are downgrading our FY15E-FY16E net profit forecasts by 17-25% to take into account the lowerthan-expected contribution from the automotive segement.

Rating & Valuation Correspondingly, we downgrade our SoP derived target price by 8% from RM2.49 to RM2.30. The stock offers a total upside of 21.8% from current price. Maintain Outperform. We believe it could be time to take a second look at DRB-Hicom as its share price is down 33% YTD, at least from a trading perspective.

Risks to Our Call  Weaker consumer sentiment.

Source: Kenanga