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Author: DoggieInvestor   |   Latest post: Thu, 29 Aug 2019, 6:37 PM

 

DRB-Hicom: Reaching 5-Year New High @ RM 2.84

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In my earlier post, i wrote about DRB-Hicom, with a focus on Proton turnaround. 

Few weeks have past, many local investment analysts have all upgraded their target price with the highest TP @ RM 4.00 and above. 

According to management discussions with the investment community, Proton's automobile sales market share has reached 14%+, slightly lagging behind Honda in Malaysia. 30 years ago, Proton once had a market share of well above 40%. I believe everyone has already seen the aesthetically designed Proton X70 on the road. The CKD model of X50 will be made available for sales in 2020. 

By now, it finally becomes very clear to every investors in Malaysia that DRB-Hicom will finally turnaround, thanks to its JV with Geely. Proton also signed an Intellectual Property sharing agreement with Geely for Proton to leverage on Geely's automobile manufacturing technology for its Proton production line in Shah Alam. Geely, being the largest, majority owned by Chinese automaker in China, is undoubtedly has pretty efficient automobile manufacturing technology. Not to mention that Geely is also the front-runner in launching their first Full Electric Vehicle model in China. 

There is little doubt that DRB-Hicom's share price will continue to do well going forward. But do note that Bank Mualamat's CEO had recently resigned and Bank Mualamat accounts for ~30% of DRB-Hicom RNAV. 

Despite Proton's turnaround is already a done deal. Investors are also snapping up DRB-Hicom shares in anticipation of huge increase in earnings from Proton's contribution going forward. Bank Mualamat will remain an overhang for DRB-Hicom overall Group's performance and Net Asset Value. 

Some sell-side analysts valued DRB's 50.1% stake in Proton at a paltry RM 450m - RM 500m. They had been all proven WRONG. By raising their TP to RM 4.00, the implied valuation on Proton has gone up from RM 500m to RM 1,500 million; we factor in 30% RNAV discount on DRB-Hicom as it is a very large conglomerate. 

Automobile company usually trades at 10x forward P/E. Market has already factored in a RM 150m net earnings from Proton's 50.1% stake. This is saying that Proton will make RM 300 million in the foreseable future. 

Assuming Proton has a Net Margin of 7%, Proton needs to achieve RM 4.3 billion of sales per annum. If the ex-factory price of a X70 is RM 110,000 (pure guessing here), Proton needs to sell 39,000 units of X70 every year. While it is not unachievable in our view, we do believe the market expectation is definitely on the high side. Malaysia's automobile market is 600,000 units a year. To sell 39,000 units of X70 means ONE single model accounts for 6.5% market share. We believe it's achievable but not sustainable in the long run. 

Anyway, good news have been priced in. Our humble opinion. 

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