• DRB-Hicom announced that it is aiming to complete the divestment of Alam Flora Sdn Bhd (AFSB) to Malakoff at RM944.6mil by the end of CY2019. This was caused by a delay in obtaining all the required authority approvals for the transaction.

• Following the disposal, RM500.0 million of the sales proceeds will be used to reduce the group’s debt levels with the remaining RM444.6 million utilised for capex to turn around Proton. The transaction is expected to result in an estimated net gain of RM735.4 million.

• On the positive aspects, the group’s debt levels will be reduced. Hence, this will lower the group’s finance costs by RM30.0 million based on an estimated 6% annual interest rate.

• However, with the disposal, DRB-Hicom will no longer benefit from AFSB’s contribution of circa RM100 million annually to the group’s earnings. We believe that this will negatively impact the group’s earnings from FY20 onwards after the completion of the exercise despite extracting savings on its interest cost.

• We are not making any changes to our earnings estimates as we have already factored in the impact of the divestment of AFSB into our projections for FY20 and beyond.

• Meanwhile, sales of CBU units of the Proton X70 have started to materialise and this will be reflected in the following quarter’s results. However, we believe that the X70 will not significantly turn around the automotive segment’s profitability as yet in FY19. Nevertheless, it will reduce the inherent volatility in DRB’s earnings. Key re-rating catalysts for the stock include: i) Substantial improvement in Proton’s profitability; and ii) Future success of its export sales in the Southeast Asian region; profit margins for international sales are higher than that of domestic.

• We believe that the group should build a captive market for the X70 ahead of its localisation for Proton to be profitable in both its domestic and export sales.

• We maintain HOLD with an FV of RM1.99/share on DRB-Hicom based on SOP valuation.

Source: AmInvest Research - 12 Apr 2019