DRB’s 1HFY16 results remain dismal, barely breaking even after factoring in non-recurring gains of MYR75.9m. Proton’s losses and high financing costs are culprits with other business reporting stable revenues. We maintain our NEUTRAL call and MYR1.18 TP (6.3% downside) although we are increasingly concerned over its deteriorating balance sheet and the weak outlook for Proton.

Within our expectations. DRB-HICOM (DRB) reported a small profit for the quarter under review, bringing the cumulative net loss for 1HFY16 (Mar) to MYR15.8m. However, the notes to the accounts revealed that there were inventory write-backs and mark-to-market gains on derivatives totaling MYR75.9m during the quarter that helped to mask extremely weak underlying earnings. Recurring earnings were below our expectations but significantly below street estimates of a net profit of MYR187.4m. We highlight DRB’s negative free cash flow (YTD MYR1.8bn) and its deteriorating balance sheet. After three issuances of Perpetual Sukuk raising net proceeds of MYR224m this FY, we estimate net gearing at 0.8x with net interest cover estimated at just 1.9x.

Proton is DRB’s millstone. Segmental earnings for the property and services divisions were generally stable QoQ and within expectations.However the core automotive division reported an operating loss of MYR31.8m for the quarter (cumulative MYR108.8m loss) likely due to Proton, given that defence & aviation reported positive growth. Although Proton sales improved QoQ, cumulative 1HFY16 sales continue to languish, declining 11.8% YoY. The competitive marketplace means that volumes were achieved only by sacrificing margins. Onerous finance costs (MYR190.0m) were also a drag on earnings.

Forecasts and risks. We leave our forecasts unchanged. Key risks include unfavourable forex ovements and weak consumer sentiment crimping auto sales.

Maintain NEUTRAL. We maintain our MYR1.18 TP derived from valuing the stock at 0.3x P/BV, close to its five-year trough valuation, to reflect DRB’s increasingly shaky balance sheet. We see few reasons to be more positive on the outlook for Proton in the current adverse market environment. At the minimum, DRB will need to start monetizing assets the relieve the rising stress on its balance sheet.