DRB-Hicom‟s (DRB) 100%-owned subsidiary, KL Airport Services (KLAS), had entered a conditional share sale and purchase agreement with Bendahara 1 (a SPV of Ekuinas) to acquire 155.46m shares or 61.6% of Konsortium Logistik (KLB) for RM240.97m (or RM1.55 per KLB share). With the proposed acquisition, KLAS will be obliged to extend a mandatory general offer (MGO) for the remaining 96.86m shares in KLB at an offer price of RM1.55/share. We are neutral on the deal as we view KLB acquisition to be synergistic with logistics operations of KLAS and DRB‟s 32.2% associate, Pos Malaysia but the acquisition pricing appears to be relatively high. We maintain our Outperform call on DRB-Hicom with an unchanged 12-month target price of RM3.53.

Details on KLB. KLB is principally involved in provision of logistics services and inventory solutions including container haulage services, freight, shipping and warehousing services. Its container haulage division contributed RM104.6m or 39% of group‟s total revenue in 2012, and it is the leading haulier in the central and southern regions with estimated market share of 7.4% and 10.0% respectively in 2012. Its other key division, automotive logistics, contributed RM96.5m or 36% of group‟s total revenue in 2012, and provides logistics services to all three local car manufacturers, Proton, Perodua and Naza.

Terms and rationale of acquisition. DRB would potentially be paying a total of RM391.09m for 100% of KLB comprising: (i) RM240.97m for 61.6% stake from Ekuinas; (ii) RM150.13m for remaining shares under MGO. The acquisition will enable KLAS to be an integrated logistics services provider and provide a complete air-sea-land transportation services. The deal is expected to be completed by 1Q14 and will be funded by internally-generated funds & external borrowings. Assuming the KLB acquisition is fully funded by external debts, DRB‟s proforma net gearing ratio will marginally increase to 0.51x from 0.45x as at end-FY13 (Mar).

Our views on the deal. We are neutral on the acquisition. On the positive side, KLB operations will have synergies with KLAS air logistics service and can complement Pos Malaysia‟s last-mile capabilities. On the other hand, the acquisition price appears to be on the high side with valuation of 23.6x of FY12 EPS and 2.0x of NAV. However, if DRB can extract significant synergies (including tie-ups with its related company MMC which manages Johor ports & Senai airport) and develop KLAS into an integrated logistics provider, it will be able to justify the rather lofty valuation.

Maintain Outperform. We reiterate our Outperform call on DRB-Hicom with a 12-month target price of RM3.53 based on sum-of-parts valuation (based on adjusted book value multiple and RNAV). We believe its current share price is not reflecting the underlying value of the assets within DRB such as its 70%-stake in Bank Muamalat, its 32%-stake in Pos Malaysia and its huge prime landbank.

Source: PublicInvest Research - 28 Oct 2013