Company Focus

DRB-HICOM
Bloomberg: DRB MK | Reuters: DRBM.KL Refer to important disclosures at the end of this report

Malaysia Equity Research 28 Nov 2014

HOLD RM1.90
RM1.90 KLCI : 1,829.91 Proton remains a drag
(Downgrade from BUY)
Price Target : 12-Month RM 2.00 (Prev RM 3.50) • 2QFY15 core earnings disappointed
Shariah Compliance: Yes • Weak response to new launch, Proton Iriz
Reason for Report : Ceasing coverage, downgrade rating
Potential Catalyst: Sustainable turnaround of Proton, better earnings • Limited upside with Proton overhang
AllianceDBS vs Consensus: We are non-consensus after the
• Ceasing coverage; downgrade to Hold
downgrade
Another poor showing. DRB booked 2QFY15
Analyst headline net profit of RM93m (-14% q-o-q), taking
CHONG Tjen San, CFA +603 2604 3972 1HFY15 net profit to RM200m. This included RM97m
tjensan@alliancedbs.com gain from the sale of Uni.Asia General Insurance.
Stripping this out, the results missed our expectations.
Price Relative The automotive division booked RM9m operating loss in
RM Relative Index 2QFY15 vs RM76m profit in 1QFY15, likely due to
3.2
250 continued losses at Proton. The only bright spot was
230
210
stronger associate /JCE profit for automotive and
2.7
190 services segments. 2QFY15 automotive associate profit
170
2.2
150
(largely from Honda) grew 21% q-o-q to RM73m. YTD-
1.7 130 Sep14 TIV for Honda is 56,747 (11.5% market share),
110
1.2 90 suggesting it is on track to meet CY2014 target of
Nov-10 Nov-11 Nov-12 Nov-13 Nov-14
76,000 units.
DRB-Hicom (LHS) Relative KLCI INDEX (RHS)
Proton remains an overhang. DRB has been trying to
Forecasts and Valuation turnaround Proton, e.g. through collaboration with
FY Mar (RM m) 2014A
2014A 2015F
2015F 2016F
2016F 2017F
2017F Honda, rationalising suppliers, focusing on export
Revenue 14,201 17,776 17,723 20,259 markets. But it would be challenging to drive a
EBITDA 1,531 1,219 1,302 1,330
Pre-tax Profit 797 659 773 831 sustainable turnaround given the weakening brand
Net Profit 457 429 487 524 equity and rising competition. This is made worse by the
Net Pft (Pre Ex.) 252 429 487 524 lukewarm response to the Iriz which has been touted as
EPS (sen) 23.6 22.2 25.2 27.1 the last savior for Proton. Media reports claim that since
EPS Pre Ex. (sen) 13.0 22.2 25.2 27.1 its launch on September 25, only 4,000 of the 17,000
EPS Gth (%) (21) (6) 14 8
EPS Gth Pre Ex (%) 55 70 14 8
bookings have been converted to paid deposits.
Diluted EPS (sen) 23.6 22.2 25.2 27.1 According to the Edge, Proton’s vendors estimate Iriz
Net DPS (sen) 5.3 7.2 8.3 11.4 production at 2,700 units per month, which is 60% of
BV Per Share (sen) 377.9 392.9 409.8 425.5 the 4,500 units that they were told to expect.
PE (X) 8.0 8.6 7.5 7.0
PE Pre Ex. (X) 14.6 8.6 7.5 7.0 Downgrade to HOLD, ceasing coverage. We
P/Cash Flow (X) nm 2.4 3.7 3.3 downgrade DRB to HOLD with a lower TP of RM2.00
EV/EBITDA (X) 5.1 6.0 5.7 5.6 after applying lower valuation multiples for the motor
Net Div Yield (%) 2.8 3.8 4.4 6.0 and defence businesses, and a larger discount to SOP
P/Book Value (X) 0.5 0.5 0.5 0.4
Net Debt/Equity (X) 0.4 0.3 0.3 0.2 valuation. We are ceasing coverage of the stock in the
ROAE (%) 6.3 5.8 6.3 6.5 absence of visible earnings and growth prospects.

Earnings Rev (%): 0 0 0

Consensus EPS (sen
sen): At A Glance
sen : 19.1 22.7 26.0
Other Broker Recs: B: 6 S: 1 H: 1 Issued Capital (m shrs) 1,933
Mkt. Cap (RMm/US$m) 3,673 / 1,096
ICB Industry : Industrials Major Shareholders
ICB Sector: Industrial Engineering Etika Strategi Sdn (%) 55.9
Principal Business: 0 Employees Provident Fund (%) 7.0
Free Float (%) 37.1
Source of all data: Company, AllianceDBS, Bloomberg Finance L.P. Avg. Daily Vol.(‘000) 1,429

www.dbsvickers.com
ed: SGC / sa: WMT
Company Focus
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INVESTMENT THESIS

Profile Rationale
DRB is a conglomerate with diversified businesses in Turnaround of Proton
automotive (manufacturing, assembly, and distribution; i.e. • Eventual turnaround of Proton to complement its growing
wholly-own Proton, sole assembler of Honda), services (Bank motor business.
Muamalat, Uni Asia, Pos Malaysia), and property
development. Property business
• Deep value for its property business where it is stepping
up launches.

Strong synergies waiting to be tapped

• With a slew of acquisitions over the years, it is now time
to tap on synergies. Examples include Bank Muamalat
tapping on POS’ distribution outlets and its full arsenal of
logistic businesses (KLAS, KLB and
POS).

M&A
• M&A for its Islamic Bank where it is required to divest a
30% stake.

Valuation Risks
Our target price is based on a 20% discount to our sum-of- Slow down in domestic consumption, continued losses for
parts (SOP) valuation methodology Lotus
• Lotus might continue to drag the Group’s bottomline
from higher fixed costs coupled with low sales
volume.

Slower than expected turnaround for Proton

• Similarly, Proton might be the main earnings drag factor
to DRB-HICOM as sales volume could be largely impacted
by declining market share from strong competition while
margins could be affected by high operating
costs.

Source: AllianceDBS

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Key Assumptions Sensitivity Analysis

2015
FY Mar 2013A
2013A 2014A
2014A 2015F
2015F 2016F
2016F 2017F
2017F +1% volume of TIV Net Profit +1-2%
Average growth in
3.4 3.3 3.3 3.4 3.4
distribution volume
Gross NPL 2.5 2.4 2.4 2.4 2.4
Loan Loss Coverage 102.2 109.0 111.6 113.4 113.8
Alam Flora waste p.a. 1.8 1.9 2.0 2.0 2.1

Segmental Breakdown
FY Mar 2013A
2013A 2014A
2014A 2015F
2015F 2016F
2016F 2017F
2017F Assumes higher sales for
Revenues (RM m) most brands
Automotive 10,136 10,738 14,875 14,603 17,142
Property & Infrastructure 407 760 641 663 488
Services 2,591 2,703 2,260 2,457 2,629 Services to remain stable
Investment Holding 0 0 0 0 0
Others N/A N/A N/A N/A N/A
Total 13,135 14,201 17,776 17,723 20,259
Operating profit (RM m)
Automotive 195 88 313 307 286
Property & Infrastructure 39 204 77 80 56
Services 498 427 440 491 553
Investment Holding 18 (11) (21) (21) (21)
Others 0 0 0 0 0
Total 750 707 809 857 873
Operating profit Margins
(%)
Automotive 1.9 0.8 2.1 2.1 1.7
Property & Infrastructure 9.6 26.8 12.1 12.0 11.4
Services 19.2 15.8 19.5 20.0 21.0
Investment Holding N/A N/A N/A N/A N/A
Others N/A N/A N/A N/A N/A
Total 5.7 5.0 4.6 4.8 4.3

Income Statement (RM m) Margins Trend

FY Mar 2013A
2013A 2014A
2014A 2015F
2015F 2016F
2016F 2017F
2017F 7.0%
6.5%
Revenue 13,135 14,201 17,776 17,723 20,259 6.0%
5.5%
Cost of Goods Sold (12,670) (14) (2,434) (1,756) (3,258)
5.0%
Gross Profit 465 14,187 15,342 15,966 17,001 4.5%
Other Opng (Exp)/Inc 335 (13,404) (14,533) (15,109) (16,129) 4.0%
Operating Profit 800 783 809 857 873 3.5%
3.0%
Other Non Opg (Exp)/Inc 0 0 0 0 0
2.5%
Associates & JV Inc 163 178 248 284 297 2.0%
Net Interest (Exp)/Inc (338) (369) (398) (368) (338) 2013A 2014A 2015F 2016F 2017F

Exceptional Gain/(Loss) 413 205 0 0 0 Operating Margin % Net Income Margin %

Pre-
Pre-tax Profit 1,037 797 659 773 831
Tax (338) (152) (138) (162) (175)
Minority Interest (124) (188) (92) (124) (133)
Preference Dividend 0 0 0 0 0
Net Profit 575 457 429 487 524
Net Profit before Except. 163 252 429 487 524
EBITDA 1,570 1,531 1,219 1,302 1,330
Growth Higher contribution from
Revenue Gth (%) 91.0 8.1 25.2 (0.3) 14.3 Deftech and property
EBITDA Gth (%) 78.1 (2.5) (20.4) 6.8 2.2
Opg Profit Gth (%) 49.6 (2.2) 3.4 5.9 1.8
Net Profit Gth (%) (55.5) (20.6) (6.2) 13.6 7.6
Margins & Ratio
Gross Margins (%) 3.5 99.9 86.3 90.1 83.9
Opg Profit Margin (%) 6.1 5.5 4.6 4.8 4.3
Net Profit Margin (%) 4.4 3.2 2.4 2.7 2.6
ROAE (%) 8.7 6.3 5.8 6.3 6.5
ROA (%) 1.4 1.1 1.1 1.2 1.2
ROCE (%) 3.4 3.9 4.0 4.3 4.4
Div Payout Ratio (%) 17.9 22.6 32.7 32.9 42.0
Net Interest Cover (x) 2.4 2.1 2.0 2.3 2.6
Source: Company, AllianceDBS

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Quarterly / Interim Income Statement (RM m) Revenue Trend

4,500 70%
FY Mar 1Q2014
1Q2014 2Q2014
2Q2014 3Q2014
3Q2014 4Q2014
4Q2014 1Q2015
1Q2015 4,000 60%

3,500 50%
Revenue 3,055 3,649 3,329 4,168 3,725 3,000
40%

Cost of Goods Sold (3,005) (3,462) (3,305) (3,930) (3,610) 2,500

30%
20%
Gross Profit 50 187 25 238 114 2,000
10%
Other Oper. (Exp)/Inc 87 82 208 111 85 1,500
0%
1,000
Operating Profit 137 269 233 349 200 500
-10%
-20%
Other Non Opg (Exp)/Inc 0 0 0 0 0 0 -30%

4Q2012

1Q2013

2Q2013

3Q2013

4Q2013

1Q2014

2Q2014

3Q2014

4Q2014

1Q2015
Associates & JV Inc 48 45 31 54 81
Net Interest (Exp)/Inc (89) (87) (89) (104) (96)
Revenue Revenue Growth % (QoQ)
Exceptional Gain/(Loss) 0 0 0 0 0
Pre-
Pre-tax Profit 96 228 174 298 185
Tax (52) (61) 6 (45) (50)
Minority Interest (34) (29) (39) (87) (27)
Net Profit 10 138 142 167 108
Net profit bef Except. 10 138 142 167 108
EBITDA 185 315 263 402 281

Growth
Revenue Gth (%) (9.1) 19.5 (8.8) 25.2 (10.6)
EBITDA Gth (%) (54.4) 70.3 (16.3) 52.7 (30.2)
Opg Profit Gth (%) (64.5) 97.2 (13.7) 49.9 (42.8)
Net Profit Gth (%) (85.5) 1,245.3 2.6 17.9 (35.4)
Margins
Gross Margins (%) 1.6 5.1 0.7 5.7 3.1
Opg Profit Margins (%) 4.5 7.4 7.0 8.4 5.4
Net Profit Margins (%) 0.3 3.8 4.3 4.0 2.9

Balance Sheet (RM m) Asset Breakdown (2015)

FY Mar 2013A
2013A 2014A
2014A 2015F
2015F 2016F
2016F 2017F
2017F
Net Fixed Assets 4,984 5,561 6,200 6,840 7,479
Invts in Associates & JVs 1,613 1,640 1,888 2,172 2,468
Other LT Assets 18,300 18,241 18,241 18,241 18,241
Cash & ST Invts 6,628 4,137 4,252 3,794 3,392
Inventory 1,990 2,038 2,222 2,215 2,532
Debtors 4,306 3,830 4,444 3,938 4,052
Other Current Assets 4,311 4,282 4,282 4,282 4,282
Total Assets 42,130 39,727 41,527 41,480 42,444

ST Debt 2,809 1,780 1,780 1,780 1,780

Creditor 5,505 5,330 7,110 7,089 8,104
Other Current Liab 19,721 18,463 18,601 18,625 18,637
LT Debt 3,668 5,360 4,860 4,360 3,860
Other LT Liabilities 2,073 289 289 289 289
Shareholder’s Equity 7,103 7,308 7,597 7,923 8,227
Minority Interests 1,254 1,200 1,292 1,416 1,549
Total Cap. & Liab. 42,132 39,729 41,527 41,480 42,444

Non-Cash Wkg. Capital (14,619) (13,642) (14,764) (15,279) (15,875)

Net Cash/(Debt) 151 (3,002) (2,387) (2,345) (2,248)
Debtors Turn (avg days) 103.9 104.6 84.9 86.3 72.0
Creditors Turn (avg days) 173.5 (3,549.6) 998.9 1,624.2 895.3
Gearing could rise if
Inventory Turn (avg days) 53.1 (1,319.8) 342.1 507.6 279.8
there is more capital
Asset Turnover (x) 0.3 0.3 0.4 0.4 0.5
raising for Proton
Current Ratio (x) 0.6 0.6 0.6 0.5 0.5
Quick Ratio (x) 0.4 0.3 0.3 0.3 0.3
Net Debt/Equity (X) CASH 0.4 0.3 0.3 0.2
Net Debt/Equity ex MI (X) CASH 0.4 0.3 0.3 0.3
Capex to Debt (%) 12.9 13.4 12.0 13.0 14.2
Z-Score (X) 0.3 0.3 0.4 0.4 0.4
Source: Company, AllianceDBS

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Cash Flow Statement (RM m) Capital Expenditure

FY Mar 2013A
2013A 2014A
2014A 2015F
2015F 2016F
2016F 2017F
2017F
1000
Pre-Tax Profit 1,037 797 659 773 831 950
Dep. & Amort. 610 573 163 163 163
900
Tax Paid (195) (81) 0 (138) (162)
850
Assoc. & JV Inc/(loss) (163) (178) (248) (284) (297)
800
Chg in Wkg.Cap. (1,491) (977) 983 491 584
Other Operating CF (890) (1,681) 0 0 0 750

Net Operating CF (1,092) (1,547) 1,557 1,004 1,119 700

2013A 2014A 2015F 2016F 2017F
Capital Exp.(net) (837) (959) (800) (800) (800)
Other Invts.(net) (3,803) (1,911) 0 0 0 Capital Expenditure (-)

Invts in Assoc. & JV 0 0 0 0 0

Div from Assoc & JV 0 0 0 0 0
Other Investing CF 3,732 1,954 0 0 0
Net Investing CF (908) (916) (800) (800) (800)
Div Paid (77) (361) (140) (160) (220)
Chg in Gross Debt 1,154 358 (500) (500) (500)
Capital Issues 0 0 0 0 0
Capex for Proton and
Other Financing CF 8 (24) 0 0 0
other businesses
Net Financing CF 1,085 (26) (640) (660) (720)
Currency Adjustments 0 0 0 0 0
Chg in Cash (914) (2,489) 117 (456) (401)
Opg CFPS (sen) 20.7 (29.5) 29.7 26.6 27.7
Free CFPS (sen) (99.8) (129.6) 39.2 10.6 16.5
Source: Company, AllianceDBS

Target Price & Ratings History

3.00 RM
Cl os i ng Ta rg e t
S.No . Da te R a ti ng
Pri c e Pri c e
2.80 2
1: 29 Nov 13 2.59 3.50 Buy
2: 03 Feb 14 2.70 3.50 Buy
2.60
4 3: 28 Feb 14 2.55 3.50 Buy
1 4: 30 May 14 2.46 3.50 Buy
3
2.40 5: 29 Aug 14 2.21 3.50 Buy

2.20
5
2.00

1.80
Nov-13 Mar-14 Jul-14 Nov-14

Not e : Share price and Target price are adjusted for corporate actions.

Source: Company, AllianceDBS

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DISCLOSURE

Stock rating definitions

STRONG BUY - > 20% total return over the next 3 months, with identifiable share price catalysts within this time frame
BUY - > 15% total return over the next 12 months for small caps, >10% for large caps
HOLD - -10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps
FULLY VALUED - negative total return > -10% over the next 12 months
SELL - negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame

Commonly used abbreviations

Adex = advertising expenditure EPS = earnings per share PBT = profit before tax
bn = billion EV = enterprise value P/B = price / book ratio
BV = book value FCF = free cash flow P/E = price / earnings ratio
CF = cash flow FV = fair value PEG = P/E ratio to growth ratio
CAGR = compounded annual growth rate FY = financial year q-o-q = quarter-on-quarter
Capex = capital expenditure m = million RM = Ringgit
CY = calendar year M-o-m = month-on-month ROA = return on assets
Div yld = dividend yield NAV = net assets value ROE = return on equity
DCF = discounted cash flow NM = not meaningful TP = target price
DDM = dividend discount model NTA = net tangible assets trn = trillion
DPS = dividend per share NR = not rated WACC = weighted average cost of capital
EBIT = earnings before interest & tax p.a. = per annum y-o-y = year-on-year
EBITDA = EBIT before depreciation and amortisation PAT = profit after tax YTD = year-to-date

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DISCLAIMER

This report has been prepared for information purposes only by AllianceDBS Research Sdn Bhd (“ADBSR”) (formerly known as HwangDBS
Vickers Research Sdn Bhd), a subsidiary of Alliance Investment Bank Berhad (“AIBB”) and an associate of DBS Vickers Securities Holdings Pte Ltd
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opinion expressed herein is subject to change without prior notice and may differ or be contrary to opinions expressed by ADBSR’s affiliates
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Published and Printed by

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