12M17 core losses at RM732.5m, appears to be below expectations compared to our full-year net loss forecasts of RM82m and consensus loss of RM297m. However, we expect losses to be narrowed in subsequent quarters in anticipation of better car sales on the back of improving consumer sentiment. We keep our FY18E and FY19E earning forecasts unchanged. Our SoP-derived target price is trimmed slightly lower from RM1.75 to RM1.65 (20% discount to holding company) due to concern over execution risk in the new partnership in reviving Proton over the longer term. Reiterate Market Perform rating.

Key Result Highlights

QoQ, 4Q17 register a pre-tax loss of RM255.6m compared with a profit of RM422.3m in 3Q17 due to higher losses at automotive segment as a result of poor performance of certain companies. We are unable to ascertain whether the losses were one-off. This brings 3Q17 headline LATAMI to RM328.5m. However, excluding intangible assets written off (RM71.3m) and net foreign exchanges differences (RM37.8m) in 4Q17, core net loss widened to RM295m compared to RM23.7m in 3Q17 excluding one-off gains from disposal of Corwin (RM398.1m), exceptional loss on re-measurement of previously held equity interest in Pos Malaysia (RM130.2m) and unrealised foreign exchange losses (RM21.4m). An announcement of the dividend payment for FY17 will be made upon the finalisation of the audited financial statements in July 2017.

YoY, 12M17 reported LATAMI narrowed to RM454m compared to RM992m in 12M16 largely due to better contribution from property, asset & construction division. Revenue rose 26% due largely to consolidation of 53.5%-owned POS Malaysia. Specifically, services improved by 41.4%, contributed by higher performance from Logistics since Pos Malaysia’s consolidation into the Group in September 2016. However, the usual suspect automotive was lower due to subdued sales of motor vehicles as the Proton marque continued to disappoint with negative sales growth of 23% and lower AV8 percentage of completion dampened overall Automotive performance. Excluding one-off gains from divestment of Corwin (RM398.1m), exceptional loss on re-measurement of previously held equity interest in Pos Malaysia (RM130.2m), unrealised foreign exchange losses (RM81.9m) and intangible asset written off (RM71.3m) 12M17 core net losses narrowed to RM732m compared to RM992m in 12M16 on the back of better contribution from the services segment.

Outlook. The recently announced binding heads of agreement with Geely as Porton strategic partnership put DRB on a better footing. While Geely is more popularly known for its successful acquisition of Volvo, we are sceptical on its ability to assist Proton from a technical and marketing perspective as well as to penetrate new markets given that Geely is also a relatively weak brand from a global perspective with a global market share of <5%. Proton still has to deal with the challenges posed by increasing competition and a weak brand perception. The outlook for DRB remains challenging given the tough operating environment of lower sales of motor vehicles amidst stiff competition.

Maintain Market Perform. Our SoP-derived target price is trim slightly lower from RM1.75 to RM1.65 (20% discount to holding company status) due to concern over execution risk in the new partnership in reviving Proton over the longer term. Reiterate Market Perform rating.

Source: Kenanga Research - 31 May 2017