Proton to develop six versions of engines from 1.0 litres to 1.5 litres
KUALA LUMPUR: CIMB Equities Research is retaining its Add call for DRB-Hicom and unchanged sum-of-part based target price of RM2.35. Its last traded price was RM1.59.
It said on Monday narrowing losses by Proton and higher-than-expected profit contribution from the services division are potential re-rating catalysts.
The key downside risks to its call are delays in the Proton-Geely joint venture and weaker contribution from the services division.
To recap, DRB-Hicom posted a lower core net loss of RM129mil in 1QFY3/18 (vs. RM143mil in 1QFY3/17) due to reduced losses by Proton and stronger contribution from the service division following the inclusion of Pos Malaysia in September 2016.
However, the inclusion of Pos has resulted in lower share of associates’ profit, which fell from RM86.6mil in 1QFY17 to RM48.2mil in 1QFY18. DRB now owns 53.5% of Pos (vs. 32.2% previously).
Revenue in automotive grew by 19.3% on-year to RM2.1bil due to higher sales by Proton, which rose 36.7% on-year from RM829mil to RM1.1bil on the back of four new model launches in 2016.
Proton’s sales volume in the quarter increased by 21.3% on-year to 20,017 units. In addition, automotive components and distribution also recorded a strong 17.6% on-year sales growth in 1QFY18.
“Overall, the automotive division posted a lower pretax loss of RM144mil against RM149mil in 1QFY17,” it said.
Services revenue rose 72% on-year in 1QFY18 due to higher contribution from Bank Muamalat and the logistics division following the consolidation of Pos.
Services revenue accounted for 34% of group revenue in 1QFY18 compared to 26% in 1QFY17. Overall, services division pretax profit grew 50% on-year.
“We expect stronger earnings contribution from the services division, driven by Pos’s logistics and aviation business riding on growing e-commerce activities,” said the research house.
CIMB Research said DRB’s core net loss narrowed from RM238mil in 4QFY17 to RM129mil in 1QFY18, mainly due to a better performance in automotive, given that services and property, asset and construction posted lower pretax profit compared to 4QFY17.
Pretax losses in the automotive division fell from RM478mil in 4QFY17 to RM144mil in 1QFY18.
“Narrowing losses in FY18F before turning profitable in FY19F We cut FY18-20F EPS forecasts by 10%-37% as we expect higher depreciation and amortisation and tax expense and lower share of associates’ profit.
“We expect DRB to record lower losses in FY18 in view of the pending completion of the Proton-Geely joint-venture (JV).
“The JV proposal will require approvals from relevant authorities and shareholders of DRB at the upcoming EGM on Aug 30, 2017. Overall, we expect the exercise to be completed in 2HFY3/18,” it said.
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