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Wednesday, November 30, 2016

Brokers Report: DRB-Hicom - Improved QoQ Volume in Proton

Upgrade outperform with an unchanged target price (TP) of RM1.31

DRB-Hicom (DRB)
reported a net loss of RM309.6m in 2QFY17 (2QFY16: net profit of RM3.9m). Cumulatively, its 1HFY17 net loss was RM478.9m. Excluding one-off loss on re-measurement of previously held equity interest in Pos Malaysia of RM130.2m as well as forex loss on borrowings and payables of RM98.3m, the core net loss for 1HFY17 was RM250.4m. It was below our and market expectations, making up 57% and more than 100% of full-year loss estimates. Its revenue for 2QFY17 increased by 5.7% QoQ to RM2.6bn, on the back of higher sales volume for Proton (+5.1%). Given a sharp fall of 27% in DRB’s share price since October, our unchanged TP of RM1.31 suggests a potential upside of 34%. We see the completion of its foreign strategic partner exercise as near term catalyst. Hence, we upgrade our call on DRB to Outperform.
  • Automotive division. DRB’s automotive division recorded 2Q17 pre-tax loss of RM166.0m, from a PBT of RM11.4m in 2Q16. This was mainly due to lower contribution from its defence and aviation segment (-25.3% YoY), on the back of lower percentage completion of AV8 project. The division was also dragged by lower vehicle sales volume, through lower sales performance by Proton (-49.1% YoY), Audi (-62.3% YoY), Lotus (-21.5%) as well as in the absence of Suzuki marque. Nevertheless, revenue for auto division in 2Q17 increased by 7.9% QoQ to RM1.9bn. This was mainly due to improved sales volume by Proton (+5.1% QoQ), on the back of new launched of Persona and Saga model in August and September 2016 respectively.
  • Services & PAC performance. Its services division pre-tax profit for 2Q17 declined by 28.8% YoY to RM56.4m due to higher operational cost and recognition of loss on re-measurement of previously held equity interest in Pos Malaysia of RM130.2m. Its revenue slightly increased by 3.6% YoY on the back of better performance from its banking (+8.7% YoY) and logistic (+14.3% YoY) businesses. As the Group has just completed the consolidation of its logistics businesses (i.e. KLAS, KLB and ACE) under Pos Malaysia in September 2016, we expect the numbers would only be reflected in 3Q17. Meanwhile, its property division recorded a pre-tax loss of RM9.4m (2Q16: PBT of RM4.4m) although revenue increased by 19.6% YoY from the on-going property development projects i.e. Glenmarie Johor, Proton City and Laman Glenmarie.
  • Upgrade to Outperform. We expect recent new model launched by Proton (i.e. 4 new models since August to October 2016), will help to improve its performance for the automotive division in the 2HFY17, hence maintain our earnings forecast. In addition, Proton has already shortlisted three global auto companies and on track to complete its foreign strategic partner (FSP) exercises by 1H 2017, which provide an opportunity for them to increase its plant utilisation rate and cost efficiency.

Source: PublicInvest Research - 30 November 2016

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