Results

Below - Reported 3QFY3/13 core loss of RM80.5m, dragged 9MFY3/13 earnings down to RM52.1m, achieving 15.1% of HLIB estimates and 13.3% of consensus. However, we remained positive on DRB’s restructuring plan.

Deviations

Lower than expected automotive sales and higher than expected operational cost (promotional campaigns).

Dividends

Declared interim gross dividend of 1.5 sen minus 25% tax. Highlights

3Q13 revenue increased 63.8% yoy due to the consolidation of Proton Group (including Lotus), but down 21.5% qoq on the back of excessive promotional campaigns to boost automotive (all marques e.g. Proton, Audi, VW etc) sales in the quarter.

Overall Group EBIT margin turned negative in 3Q13 due to the high sales and distributional expenses, combined with the lower revenue of automotive division. We understand that Proton was making minor profits while Lotus still incurred huge losses in the quarter.

Similarly, associate contribution dropped 20.9% qoq due to aggressive campaigns by Honda to boost year end sales.

Hicom Power disposal was completed by end 2012 for RM575m cash. DRB recognized disposal gain of RM412.6m and reversal of overhaul provision of RM78.9m in 3Q13.

Net gearing improved to 48.1% in 3Q13 from 56.7% in 2Q13, after using the cash proceeds from Hicom Power disposal to pare down debts level.

Risks

• Prolonged bank tightening measures on lending rules.
• Slowdown of Malaysia economy affecting car sales.
• Global automotive supply chain disruption.
• Slow integration of Proton and Pos.

Forecasts

Cut earnings for FY13 by 54.3% after accounting for the lower automotive sales and aggressive promotional campaigns in FY13. We have also adjusted FY14-15 earnings downwards by 10.5% and 10.8% respectively.

Rating

BUY

• Positives –
  • Acquiring and restructuring of Proton, to turn DRB into a major integrated automotive player in the region.
  • Partnering VW group to set up regional hub in Malaysia.
  • Honda Malaysia to set up regional hub for Hybrid car.
  • Severely undervalued counter.
  • Deftech awards of RM7.55bn over 7 years.
  • Synergy of POS with DRB’s other business units.
• Negatives –
  • Bank tightening financing measures.

Valuation

• Maintained Buy on DRB with lower Target Price of RM3.30 (from RM3.52) based on 20% discounts to SOP.

Source: Hong Leong Investment Bank Research - 28 Feb 2013