Results

• Below Expectations – DRB reported core profits of RM25.0m for 2QFY03/15, but still losses of RM46.4m for 1HFY03/15, behind HLIB’s profit expectation of RM176.8m and consensus’ RM224.5m.

Deviations

• Lower than expected sales volume for automotive segment (especially Proton) and average pricing (higher discount offers to boost car sales volume and pricing pressure on manufacturing sector).

Dividends

• None.

Highlights

• QoQ: Revenue improved 10.3% QoQ mainly on automotive sales recovery from GST implementation in 1QFY16 (April 2015) and higher contribution from Deftech and CTRM. EBIT recovered to RM79.2m (from RM47.4m losses in 1QFY16) on lower automotive losses. Associates and JV contributions declined 21.5% QoQ on lower margins for automotive division (Honda being affected by the fire incident in September 2015).

• YoY: EBIT margin improved YoY due to stronger contribution from higher Bank Muamalat contributions which offset the higher losses from automotive segment.

• YTD: EBIT margin declined on weaker performance of automotive division, given the continued disappointing sales of Proton, weaken industry margin on higher input costs (RM depreciation) and higher sales and distribution costs.

• Outlook: The weakened consumer sentiments (affecting car demand) forced the industry to be more competitive for sales, which increased sales and distribution expenses while RM depreciation has affected the input costs for automotive sector. Proton is banking on new launch of Perdana, Persona and Saga in 2016 to improve group performance.

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 forecasts for FY16-18 by 38.8%, 10.2% and 6.1% respectively, factoring in lower margins for automotive division due to higher input and operational costs.

Rating

BUY

Positives

• 1) Restructuring of Proton and Lotus; 2) Partnering VW group to set up regional hub in Malaysia; 3) Honda Malaysia to set up regional hub for Hybrid car; 4) Deftech’s MoD contract of RM7.55bn over 7 years; and 5) Synergy of POS with DRB’s other business units.

Negatives

• 1) Tighter financing rules; 2) Weakened consumer sentiment; 3) Weakening of MYR; and 4) Intense competition from rival automotive marques.

Valuation

• Maintained Buy on DRB with lower Target Price of RM1.60 (from RM1.72) based on 20% discounts to SOP.

Source: Hong Leong Investment Bank Research - 27 Nov 2015