DRB-Hicom (DRB) management hosted a group of 30 analysts and fund managers yesterday at Proton City, Tanjung Malim. The group was given a talk on the strategic plans of Proton, a tour of Proton's Tanjung Malim plant and Proton City's residential development. We believe DRB's current share price is not reflecting the intrinsic value of assets within the sprawling conglomerate and maintain our Outperform call on the group.

Proton's Strategic Plans. Dato's Lukman, Deputy CEO of Proton, gave a breifing on Proton's 5-year business and strategic plans. The business plans have been approved by DRB's board and will target annual car sales of 500,000 units by 2017/18. In light of the relatively saturated domestic market, Proton will aim to grow its overseas market including potential CKD programme in foreign countries.

Relocation of Proton's Shah Alam plant? Yes but timing is the key issue and it is not likely to be within the next five years. Currently, Proton's Tanjung Malim and Shah Alam plants have production capacities of 150,000 cars and 210,000 cars respectively. With significant sunk costs in the Shah Alam plant and prohibitive relocation costs (including need for buffer stock), there is a need to fully optimise existing assets. As such, we believe the Shah Alam plant will continue to produce the existing models (Saga, Satria Neo, Exora and Inspira) until they are eventually phased out. Its Tanjung Malim plant currently produces newer models such as Preve.

New models in the pipeline. Proton will roll out phase 1 of the Perdana replacement model for government use in December 2013. However, phase 2 of the Perdana replacement model which targets the mass market will only be rolled out within 2 years. Proton will introduce a global small car (GSC) which is a B-segment car in early next year. We believe the GSC will be a critical game-changer for Proton as it needs the volume in the popular B-segment to drive its capacity utilisation and profitability. On Honda-Proton patnership, it is currently for platform sharing but they are also exploring other possible areas such as technology transfer and 'best practices'.

New N-S highway interchange for Proton City. Management highlighted a new N-S highway interchange for Proton City has been approved by authorities and construction will commence in 2014.

Maintain outperform. We maintain our Outperform call on DRB with an unchanged target price of RM3.53 based on sum-of-parts valuation. While the realisation of assets within DRB will take some time, we believe the near-term catalyst for the group will be the disposal of its insurance arm, Uni,Asia (sale of Uni.Asia lige has been submitted to Ministry of Finance for approval, while disposal of its Uni.Asia general insurance arm had yet to be announced). Once the disposal of its insurance arm is completed, DRB-Hicom can be shariah-compliant and will appeal to a wider base of investors, in particular shariah-compliant funds.

Source: PublicInvest Research - 7 Nov 2013