DRB-Hicom Bhd
(Nov 28, RM1.81)
Maintain outperform call with a lower target price (TP) of RM3. DRB-Hicom (DRB) reported revenue of RM3.22 billion and a net profit of RM93.1 million for the second quarter of financial year 2015 (2QFY15).  Excluding disposal gains of RM97.5 million its first half of FY15 (1HFY15) core pre-tax profit of RM263.7 million was below our and market expectations making up 44.7% and 40.9% of our and concensus full-year estimates respectively.

The company’s 1HFY15 reported earnings were driven by higher armoured vehicle 8x8 (AV8) completion, its 34%-owned associate — Honda Malaysia, concession businesses and gain on disposal of UniAsia General Insurance.

However, its key automotive division was weighed down by Proton which only launched its new Proton Iriz at the end of 2QFY15. We maintain our “outperform” call on DRB-Hicom with a lower TP of RM3 from the previous RM3.20 after lowering valuation of its automotive segment.

While DRB’s share price performance has been dismal, we reiterate that DRB’s current price is not reflecting its long-term potential and value of assets within the group.

With regard to market concerns about Proton, even in a worst-case scenario where Proton’s auto business is written off, DRB’s other assets are still worth more than RM2.80 per share, excluding net debt of RM5 billion. DRB’s automotive division recorded weaker 2QFY15 pre-tax profit of RM43.6 million mainly due to Proton selling only 27,709 cars during the quarter as it only launched its new Proton Iriz at the end of 2QFY15. However, the division was lifted by improved contribution of RM72.8 million from associates such as Honda Malaysia which sold 19,544 cars and increased progress completion of AV8 armoured carriers.

Management indicated the new car had 6,500 confirmed bookings, which were below our expectations.  — Public Investment Bank, Nov 28

This article first appeared in The Edge Financial Daily, on December 1, 2014.