Results

• Below Expectation – DRB reported core losses of RM17.0m for 3QFY3/15, dragged down 9MFY03/15 core earnings to RM149.5m vs. HLIB’s RM322.4m and consensus RM314.8m.

Deviations

• Mainly due to lower than expected margins, higher than expected tax expenses and minority interest.

Dividends

• Declared net interim dividend of 1.5sen.

Highlights

• 3QFY15 QoQ: Despite higher revenue by 9.4% (higher revenue recognition from Deftech and CTRM, as well as service segment), EBIT margin stayed flat at 1.5%, mainly due to lower margins from Proton and automotive manufacturing. JV/Associate contributions also declined QoQ due to stiff competitions and lower margins (higher marketing and distributional costs). 3QFY15 was also hit by higher tax expenses.

• 3QFY15 YoY: Similarly, revenue increased 6.0% YoY mainly due to Deftech and CTRM. However, EBIT margin dropped due to lower contribution from Bank Muamalat and absence of Insurance business. The higher associate and JVs contributions were offset by higher tax expenses.

• 9MFY15 YoY: Core PATAMI declined by 17.9% YoY to RM149.5m, due to weaker group margins, higher net finance expenses and higher tax expenses (which was partially offset by higher contributions from associate and JVs).

• Outlook: Entering CY15, automotive industry is expected to be impacted by weakened consumer sentiments. The group will continue with its aggressive sales and business strategies to push sales and gain market shares, which may affect margins. They are banking on Proton Iriz, which is slowly gaining pace in 4Q15, while Lotus is expected to turnaround in 2016.

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 FY03/15-17 earnings by 36.6%, 5.6% and 3.6% respectively, after assuming lower margins due to lower intense marketing activities in FY03/15.

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) Severely undervalued counter; 5) Deftech’s MoD contract of RM7.55bn over 7 years; and 6) Synergy of POS with DRB’s other business units.

Negatives

• 1) Banks tighten financing rules; 2) Weakeningof MYR; and 3) weak consumer sentiment.

Valuation

• Maintained Buy on DRB with lower Target Price (post earnings cuts) of RM2.75 (from RM2.80) based on 20% discounts to SOP.

Source: Hong Leong Investment Bank Research - 27 Feb 2015