No change to our BUY call on DRB-HICOM (DRB). Our conservative sum-of-parts derived fair value is unchanged at RM3.30. We continue to believe DRB has multiyear latent earnings potential and hidden asset value, although time will be needed to implement new initiatives to rationalise its myriad businesses. A substantive collaboration arrangement with Honda could help to re-rate the stock higher.

-  Below expectations. DRB’s FY13 reported earnings were below our and consensus forecasts. Although revenue and pretax profit were in line with expectations, net profit for the year of MYR575.3m reached just 75% of our forecast due to higher-than-expected effective tax rates and higher minority interest charges. FY13 earnings were boosted by an exceptional gain of MYR412.6m from the sale of Hicom Power, in addition to two other non-recurring gains totalling MYR133.5m from property and services segments. Core net profit contracted 49.4% y-o-y. Finance cost was a major drag on earnings, up 120.8% y-o-y to MYR337.6m mainly to fund the debt taken to acquire Proton. 

- Inclusion of Proton lifts group revenue. DRB’s revenue jumped 91% y-o-y due mainly to the inclusion of Proton. Accordingly automotive segment revenue grew 150% y-o-y. Property revenue rose 56.5% y-o-y from the higher completion of projects while services revenue was stable (+1.3%) despite the disposal of Hicom Power in Dec 2012. 

- Significant sequential improvement in automotive earnings. 4QFY13 segmental earnings at the automotive division showed a significant improvement, rising to MYR202.2m from a loss of MYR89.1m in the preceding quarter and 9MFY13 cumulative loss of MYR7.3m, despite lacklustre domestic Proton sales. Most of the other automotive marques within the group performed well and could indicate a stabilisation of losses at Group Lotus. Associate contributions from 34%-owned Honda Malaysia disappointed despite the recovery in Honda sales volumes. 

- Forecasts lowered. We slash our FY14 net profit forecast by 32.8% and introduce our FY15 earnings estimate.

Source: RHB