DRB-Hicom‟s wholly-owned subsidiary Deftech has entered into a share sale agreement with MOF (a corporate body under Ministry of Finance) to acquire 96.87% of Composites Technology Research Malaysia (CTRM) for a total consideration of RM298.26m. The acquisition news has been anticipated as Deftech has already accepted a letter of offer from MOF to acquire CTRM in February 2013. We are neutral on the deal. On the positive side, CTRM will be complementary to Deftech‟s military business particularly in aviation, and its expertise in lightweight composite materials will be useful for its automotive division. On the other hand, there are lingering concerns on the integration of government-owned CTRM and addition of another unit to DRB-Hicom‟s myriad of businesses. We maintain our Outperform call on DRB-Hicom with an unchanged 12-month target price of RM3.53.

CTRM background and business. CTRM was incorporated in 1990 with a strategic role to develop the aerospace and composites industries. For its aerospace business, CTRM supplies composites components to Airbus and Boeing including aircraft wing parts for Airbus A320 and composites aero structure for Airbus A380. For its non-aerospace business, CTRM is involved in homeland security such as providing unmanned aerial vehicles (UAV) and transportation such as supplying composites panel for Lotus Europa S cars and Scomi‟s monorail project in Mumbai.

Purchase price of RM298m seemed reasonable. DRB-Hicom will be paying a total of RM298.26m for 96.9% of CTRM via (i) cash consideration of RM122.06m and (ii) proposed settlement of outstanding loan owed by CTRM to the government amounting to RM176.2m. Valuation-wise, DRBHicom would be paying P/BV of 1.0x and P/E of 14.8x (based on CTRM‟s FY2012 financials) for its acquisition which seemed to be reasonable.

Our views on the acquisition. We are neutral on the acquisition. On the positive side, we believe CTRM will enhance Deftech‟s military business, particularly in the aviation side and also provide technological expertise in lightweight composite materials for DRB-Hicom automotive division. On the negative side, we are concerned on the integration of government-owned CTRM and the addition of another unit to DRB-Hicom‟s diverse businesses.

Maintain Outperform. We reiterate its current share price is not reflecting the underlying value of the vast assets within DRB-Hicom but its re-rating will be driven by news flows such as unlocking of its assets (e.g. sale of its stake in Uni.Asia insurance) or positive news from its automotive division (e.g. new models from Proton-Honda collaboration). We maintain our Outperform call on the group with a 12-month target price of RM3.53.

Source: PublicInvest Research - 15 Jul 2013