DRBHCOM (1619) - CIMB Research lowers DRB-Hicom's outlook on Proton losses

CIMB Research maintained Hold on DRB-Hicom with a lower target price of 75 sen due to Proton losses.
KUALA LUMPUR: CIMB Equities Research lowered its outlook for DRB-Hicom due to the continuing losses at Proton and lower property sales as it retained its Hold call and with a lower target price of 75 sen.

DRB-Hicom posted core net loss of RM688.5mil (US$167.5mil) in FY3/16, coming in way below both the research house and consensus’ expectations of RM71.4mil (US$17.4mil) and RM138mil (US$33.6mil) core net loss, respectively.

FY16 revenue declined 13% on-year to RM11.90bil (US$2.89bil). The deviation was due to the extensive losses in its auto segment, particularly Proton, amidst the challenging operating conditions. Despite the disappointing results, a final dividend of 2.0 sen was declared.

“We cut our FY17-18 EPS by 29%-72% to account for continuing losses at Proton and lower property sales due to weak consumer sentiment. We maintain Hold on DRB-Hicom with a lower target price of 75 sen, still based on 11.0 times CY17F P/E, and introduce FY19 numbers.

“Switch to Berjaya Auto for better growth exposure in the auto sector. Key risks to our Hold call would be deteriorating performance at Proton and stronger contribution from the defense and aviation divisions,” it said.

CIMB Research said DRB-Hicom’s auto segment continues to disappoint. The segment’s 4Q16 revenue dropped 25.4% on-year while FY16 revenue slid 13.1% on-year to RM9.366bil (US$2.27bil), dragged by Proton’s contribution.

This resulted in a major decline in pre-tax loss of RM953.5mil (US$231.1mil) in FY16 (vs. FY15 net profit of RM203mil). On top of the current industry-wide operating challenges which have negatively impacted its sales volume (FY3/16: -15.4% on-year), Proton was hit by higher fixed cost on lower plant utilisation.

The research house said the FY16 services segment revenue declined 3.6% on-year due to the absence of contribution from the insurance business while its pre-tax profit recorded a 32.7% on-year decline to RM263.9m (US$64.1m).

Within this segment, banking showed improvement, with Bank Muamalat recording a revenue increase of 14% yoy. PAC segment’s revenue marginally declined by 1.5% on-year to RM293.8m (US$71.2mil) due to lower property sales, while pre-tax profit fell 73% on-year to record RM19.5m (US$4.7mil).

“We are discouraged by DRB-Hicom’s continued losses and expect the group to face further challenges in its operations despite the improvement in its defence business through CTRM.

“However, we are hopeful that the RM1.5bn soft loan grant from the government and its master plan to revive Proton will swing back its fortune. We will also be on the lookout for consumer reaction to Proton’s long-awaited launches expected this year,” it said.

DRBHCOM (1619) - CIMB Research lowers DRB-Hicom's outlook on Proton losses