We view market concerns of a struggling Proton on DRB-Hicom (DRB) have unjustifiably overshadowed the embedded value and potential of the group’s other automotive operations, concession businesses (e.g. Alam Flora, KL Airport Services and Puspakom) and substantial properties/land bank (e.g. Proton City, 250-acre Proton plant in Shah Alam, 903-acre land in Iskandar and The Verge shopping centre in Singapore). The group also owns 70% of Bank Muamalat, 32.2% of Pos Malaysia, 34% of Honda Malaysia, 100% of DEFTECH and Composites Technology Research Malaysia (CTRM). Going forward, we believe increasing contributions from AV8 project, integrated logistics and services business will mitigate any weakness from Proton.

Proton is a valid concern but showing signs of improvement. Proton has been struggling in the past few years to achieve sufficient sales volume (estimated to be 150,000 units annually) to break even. Although Proton’s latest B-segment car, Iriz, has been well-received by motor journalists, confirmed bookings of around 8,000 units since its launch at end-3Q14 were below our and market expectations. Management indicated sales of Iriz would improve after the Premium variant commenced production from December 2014 and positive feedback from owners. In addition, Lotus has performed well under new management and is planning to break even operationally by 2015.

Unlocking value within the group. During 2014, DRB disposed its general insurance arm (Uni.Asia General) for RM375m. DRB has other valuable non-core assets within the conglomerate. For example, it owns The Verge, a shopping mall in Singapore located at Little India/Rochor area with NLA of 160,000 sq ft and is estimated to be worth at least SGD300m or RM780m, and Proton’s Shah Alam plant/facilities sit on 250 acres of prime land with good accessibility. DRB is required by Bank Negara to reduce its stake in Bank Muamalat from current 70% to 40%. Management has indicated that the stake reduction can be either an outright sale or part of M&A with another financial entity.

Growing and integrating its logistics business. DRB acquired Konsortium Logistik (KLB) (container haulage and logistics services) and Gading Sari Aviation (cargo air services) to complement DRB’s plans to provide comprehensive logistics services (end-to-end supply chain management). Both KLB and Gading Sari operations have significant operational synergies with KL Airport Services’ (KLAS) air logistics service and Pos Malaysia’s extensive last-mile capabilities.

Current share price not reflecting underlying value. We reiterate our Outperform call on DRB as we believe its current price is not reflective of the group’s long-term potential and underlying value of its vast assets and businesses. With regard to market concerns over Proton, even in a worst-case scenario where Proton’s auto business is written-off, DRB’s other assets and properties are still worth more than RM2.80/share (excluding net debt of RM5.0bn).

Source: PublicInvest Research - 15 Dec 2014