DRB-Hicom - Unlocking assets
We are initiating coverage on DRB-Hicom Bhd ("DRBH") with an Outperform call, valuing it at RM3.45 based on a sum-of-parts valuation. In our view, the stock is undervalued, underpriced and clearly under-appreciated, trading at just 6.0x FY13 earnings (below its peers' average of 12.0x) and at the unjustified 36% discount to its FY13E BVPS of RM3.54. However, things could soon turn for the better as management is seriously pursuing to transform this asset and resource-rich group, unlocking earnings, gains and cash. We see new and strong growth potential in its automotive division from Proton, its assembly contract with Volkswagen (VW) and the earnings contribution from the AV8X8 (defense) contract. The group's Property division too will soon stamp its mark with the kick-start of projects worth a total GDV of RM13.3b. Another potential upside could come from the possible sale of its Shah Alam plant to VW, which may translate into c.70 sen one-off gain. With all the catalysts above, DRBH could well turn out as one of the best winning newsmakers in 2013. OUTPERFORM.
Growth to be driven by a "transformed" automotive...We see strong growth potential in its automotive division mainly from Proton, its assembly contract with Volkswagen (VW) and the earnings contribution from its AV8X8 (defense) contract. The purchase of Proton has positioned DRBH as the country's single largest automotive group with a market share of 31% for the first nine months of 2012 (9M2011:15%). We view positively the group's revival plans for Proton, which include increasing sales through the introduction of new models, growing its exports as well as turning around Lotus. Meanwhile, its tieup with VW is progressing well as the production of the VW marques is well on track. We understand that earnings contribution from the RM7.5b AV8X8 contract will also start coming in from FY14 onwards. To sum it up, all its growth "engines" will be working overtime here for the next two years.
...and a "reinvigorated" property. The group is kick-starting its property projects in 2013/2014 in a massive thrust to get its huge land banks to work for the group. This will clearly showcase management's serious commitment to transform the group's assets into earnings and cash. The group has always had a large development land bank with the hot ones now being in Iskandar, Johor and in Glenmarie, Klang Valley. For a start, new launches will total a GDV of RM323m in 2013 before being ramped up to around RM11.0b and RM2.0b in 2014 and 2015 respectively. That means its property EBIT will jump from just RM6m in FY12 to RM32m in FY13 and to RM85m in FY14.
Potential upside from sale of Shah Alam plant or its re-development. It was reported that VW is looking to make Malaysia its manufacturing hub in ASEAN and to do so, it was said to be mulling over the buyout of Proton's Shah Alam plant for the additional capacity. Should the land sale take place, based on our back-of-the-envelope calculation, this could potentially represent a c.RM0.70 per share revaluation surplus to DRBH (a potential gain on sale of RM1.5b between the reported sale price of RM150 psf and the land cost in the book of just RM10 psf). Apart from just selling the 250-acre land to VW, we believe that another possible scenario is to transfer the land to the group's property arm for redevelopment (its production activities here could be moved to its underutilised Tanjung Malim plant), which we reckon would be lucrative as well considering the growing scarcity of prime land bank in the Klang Valley.
OP with an initial target of RM3.45. The stock is clearly mispriced, trading at just 6.0x FY13 EPS (below its peers' average of 12.0x) and at a 36% discount to its FY13E BVPS of RM3.54. We project earnings to jump 33% YoY in FY13 to 22 sen largely due to the inclusion of Proton results and 45% in FY14 as contribution from its AV8X8 contract starts to kick in. This potential strong earnings rise is still under-recognised by the market for now, but not likely in the future. OUTPERFORM.
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