Investment Highlights

• We are downgrading DRB-Hicom to UNDERWEIGHT from HOLD with a lower FV of RM1.74 based on a higher discount rate of 30% in our SOP valuation from 20% previously. The downgrade is due to: (1) potential negative sentiment arising from the arrest of the group’s executives by the Malaysian Anti-Corruption Commission (MACC); and (2) uncertainties in respect of the group’s ability to secure government contracts in the future.

• On Monday, DRB-Hicom confirmed that the MACC has remanded two top executives of its wholly-owned subsidiary Defence Technologies Sdn Bhd (Deftech), in connection with a graft probe on a RM17 million defence contract. “DRB-Hicom wishes to emphasise that the group and Deftech shall provide utmost cooperation to the authorities in this matter,” it said in a statement.

• According to a local news report, the executives were alleged to have received hundreds of thousands of ringgit between 2014 and 2017 from several companies in relation to the award of the contract.

• The contract was to supply equipment for the Deftech AV8 Gempita and ACV-300 Adnan armoured combat vehicles to a defence agency.

• There may be questions if this is an isolated case or whether there is a need to relook the company’s procurement process. Also, it is uncertain if the incident will have any effect on the group’s standing in future government defence contracts.

• With that said, we believe that our increase in the SOP discount rate is justified based on the potential negative sentiment arising from the MACC’s probe.

Source: AmInvest Research - 14 May 2019