1H17 core losses at RM250.7m were reported, compared to our full-year net profit forecasts of RM26m and consensus loss of RM151m. The negative variance from our forecast was mainly due to higher-than-expected losses from the automotive segment. No dividend was declared as expected. Maintain UNDERPERFORM. Our SoP-derived target price is lowered from RM1.02 to RM0.95 following our earnings downgrade.

QoQ, 2Q17 revenue rose 6% due largely to higher contribution from automotive (+8% QoQ), attributable largely to PROTON (+5% QoQ) and lower completion percentage of the AV8 project. Pre-tax loss at the automotive division came in at RM207m compared to RM209m in 1Q17 which we believe was due to losses at PROTON group, volatility in foreign exchange rates and weak consumer sentiment. This brings 2Q reported LATAMI to RM309m. However, excluding an one-off exceptional loss on re-measurement of previously held equity interest in Pos Malaysia (RM130.2m) and unrealised foreign exchange losses (RM67.9m), 2Q17 core net losses narrowed to RM111m from RM169.3m in 1Q17. This quarter marks the fourth consecutive quarterly losses.

YoY, 1H17 reported net loss widened to RM478.9m compared to RM15.8m in 1H16. Revenue fell 17%, no thanks to lower contribution from automotive (-23%) as the Proton marque continued to disappoint with negative sales growth of 27%. Excluding one-off exceptional loss on re-measurement of previously held equity interest in Pos Malaysia (RM130.2m) and unrealised foreign exchange losses (RM98.3m), 1H17 core net losses widened to RM250.7m compared to RM15.8m in 1H16 which was further dragged down by losses at its automotive division which PROTON accounts for 70-80%.

Outlook. The outlook for DRB remains challenging given the tough operating environment of lower sales of motor vehicles amidst stiff competition as well as weak consumer demand. However, the group is looking at: (i) a turnaround plan for PROTON, which involves RM1.5b soft loan from the Government, which is geared towards helping PROTON in its turnaround efforts as well as to expand into domestic and international markets, and (ii) to identify a strategic partner by 1QCY17. Despite positive on news of a potential tie-up with a foreign partner, we expect the overall weakness in the automotive segment and the still fragile consumer sentiment to dampened DRB’s subsequent quarterly performances as well as trading sentiment. Proton still has to deal with the challenges posed by increasing competition and a weak brand perception.

Change to forecasts. We are forecasting a net loss of RM82m in FY17E compared to a profit of RM27m, due to the poor set of results by taking into account lower volume sales at the automotive division and higher operating expenses.

Maintain UNDERPERFORM. Our SoP-derived target price is lowered from RM1.02 to RM0.95 following our earnings downgrade.

Source: Kenanga Research - 30 Nov 2016