DRB-Hicom (DRB) reported a net profit of RM353.0m in 3QFY17. For 9MFY17, its net loss narrowed by 37.6% to RM126.0m. However, excluding the one-off gain on disposal on Corwin of RM398.1m, loss on re-measurement of previously held equity interest in Pos Malaysia of RM130.2m and forex loss that was recognised in 2QFY17, the core net loss for 9MFY17 widened to RM393.8m. It was within our estimates, but below market expectations, making up 74.4% and more than 100% of full-year loss estimates respectively. Its revenue for 3QFY17 increased by 29.8% QoQ, bringing its 9MFY17 revenue to be slightly above our estimates, accounting for 77.3% of our full year forecast. This was mainly due to first time consolidation of Pos Malaysia to the Group. We downgrade our call on DRB-Hicom to Neutral as the share price already surge by 45% since our upgrade in the last quarter results. Although the finalisation of its choice of foreign strategic partnership is seen as near term share price catalyst, we believe this has been largely priced in. We maintain our earnings forecast with TP of RM1.31 based on SOTP valuation.

• Automotive division. DRB’s automotive division 3Q17 pre-tax loss narrowed to RM20.1m (-87.9% QoQ) owing to increase in vehicle sales volume mainly Proton (+54.5% QoQ), Honda (+21.0% QoQ), Isuzu (+16.1%) and Audi (+54.0% QoQ). The improvement in Proton sales was on the back of favourable demand for the new Saga and Persona model. YTD 9M17, DRB reported a net loss of RM335.5m compared to a loss of RM181.1m in 9M16, due to weaker domestic demand and lower percentage completion of the AV8 project (-25.2% YoY).

• Services & PAC performance. Its services division revenue for 3Q17 increased by 70.3% QoQ due to first time consolidation of Pos Malaysia into the Group, bringing its pre-tax profit to surge by 67.6% QoQ to RM94.5m. Nevertheless, cumulative 9M17 pre-tax profit was flat YoY (-1.6%). YTD 9M17 in property, asset and construction (PAC) division reported a revenue decline by 1.4% YoY due to lower sales of property development projects. However, its property division recorded a pre-tax profit of RM395.2m, mainly due to one-off gain on disposal of Corwin Holding Pte Ltd of RM398.1m.

• Outlook. We believe the automotive division remains challenging in 4Q17 due to weaker Ringgit and muted demand for vehicles. However, we expect earnings to be cushioned by its services segment (i.e. 53.5%-Pos Malaysia, 70%-Bank Muamalat, Puspakom and Alam Flora). Meanwhile, Proton is on track to complete its foreign strategic partner (FSP) exercises by 1H 2017.

Source: PublicInvest Research - 1 Mar 2017