DRB’s  earnings for the quarter  were masked by an exceptional gain of MYR97.4m.  Maintain  BUY  with  a lower  TP  of MYR2.90 (52.6%  upside). Recurring  earnings  were  below  expectations  as  its  core  automotive division fell back into the red likely due to flaccid Proton sales. Its other divisions  have  yet  to  generate  consistent  earnings  traction.  DRB remains attractive from an RNAV perspective.

Core  automotive  earnings  below  expectations.  DRB-Hicom’s  (DRB)2QFY15  (Mar)  earnings  were  below  expectations.  Net  profit  for  the quarter  fell  13.7%  QoQ  and  32.5%  YoY  to  MYR93.1m,  despite  an exceptional  gain  of  MYR97.4m  arising  from  the  disposal  of  Uni.Asia General  Insurance.  Cumulative  1HFY15  earnings  of  MYR200.9m reached 52.7% of  our previous earnings estimate. The main reasons for the deviation  were  an operating loss of MYR8.5m (vs 1QFY15 operating profit  of  MYR75.9m)  at  its  automotive  division  and  lower  services earnings following the sale of the  insurance business. No dividend was declared for the quarter.

Proton  sales  volume  slumps.  The  loss  incurred  at  the  automotive division  was  consistent  with  the  2.3%  YoY  slump  in  Proton  vehicle sales,  which  have  been  punished  by  the  competitive  market  place, tighter  financing  conditions  and  rising  living  costs  crimping  the disposable incomes of the target market of Proton car buyers. This was offset by higher associate income from Honda Malaysia  as Honda sales surged  67.4%  YoY  during  the  period.  Management  also  reported additional progress billings from the AV8 contract. Concession earnings were  steady  while  property  earnings  were  lifted  by  contributions  from Glenmarie Gardens Phase 2. Financing costs continued to be a burden,with EBIT interest coverage at only 1.5x.

Investment case.  We lower  our FY15-16 earnings estimates by 34.2% and 17.6% respectively to reflect the slower-than-expected rollout of the Proton  Iriz  as management is intent on ensuring that quality issues are properly  resolved  before  production  is  ramped  up.  Our  BUY  call  is centred on the deep discunt to our conservative estimate of its RNAV. We trim DRB’s SOP-derived TP to MYR2.90 (from MYR3.20).

Source: RHB