Yesterday, DRB has denied media reports on the potential sale of its 100%-stake in Proton. DRB remains highly committed to hold a substantial and strategic stake in Proton. Recall that government has injected RM1.25bn into Proton in early June 2016, and Proton was expected to seek and identify a strategic and renowned partner who will assist in R&D, enabling Proton to become a competitive player in the automotive industry at international level within a year. We understand that the Group is in talks with several parties but it is still at preliminary stage. While the Group would have to adhere to the deadline given by the government owing to the capital injection, the exercise is expected to be completed by 1QFY17. We maintain our Outperform call on DRB with an unchanged SOTP-target price of RM1.26.

Unutilised capacity at Tanjung Malim may attract potential partners to set up a regional assembly or manufacturing hub for the Asean region. Historically, Proton had partnered with several car manufacturers e.g. Mitsubishi Motors (between 1985-2000 and resume collaboration in 2008), PSA Peugeot Citroën (in 1996), Honda (in 2013) and recently was Suzuki Motors (in 2015). Currently, Proton cars are manufactured in both its Shah Alam and Tanjung Malim plants, at an annual capacity of 50,000 units and 150,000 units respectively (Tanjung Malim plant can be expanded up to 1m units). If the partnering is successful, Proton has the opportunity to increase its utilisation rate (currently at less than 50%) and cost efficiency. While car manufacturing business is a volume game changer, we believe it will be too costly for Proton to develop new models on its own. As such, it will be critical for Proton to build a meaningful partnership with other global auto player and compete more effectively.

Models to be launched. In respect of new model launches, Proton will introduce another 3 new models this year, being the face-lifted model of Proton Persona and Saga, as well as new rebadged Suzuki Ertiga MPV, a product from Proton’s collaboration with Suzuki. In the past, Saga was one of the best-selling models in terms of sales volume.

We reiterate our Outperform call on DRB with unchanged 12-month SOTP target price of RM1.26. DRB is now trading at an undemanding valuation of 0.36x P/BV compared to its peers at an average of 1.2x (Figure 1 & 2). We believe the intrinsic value of DRB is in the various valuable assets embedded within the group. Other near term catalyst for DRB are (i) the potential sales of The Verge, (ii) streamlining of its logistic business by consolidating KLAS group under Pos Malaysia (which will increase shareholding in Pos from 30%-associate to 53%-subsidiary), and (iii) strategic partnership for its 70%-stake in Bank Muamalat.

Source: PublicInvest Research - 9 Aug 2016