We visited DRB-Hicom Defence Technologies’ (DEFTECH – a wholly-owned subsidiary of DRB-Hicom) exhibition area at Defence Services Asia (DSA) Exhibition & Conference and were given briefings on the products and services provided by DEFTECH. We spent most of our time on the AV8 (eight-wheeled armoured vehicle) which will go into production and delivery to Ministry of Defence (MOD) in 2014, after delivering two sealed pattern vehicles for MOD’s evaluation last year. DEFTECH is a relatively lesser known defence unit of DRB-Hicom, and the recent acquisition of CTRM will complement the capabilities of DEFTECH. We maintain our Outperform call on DRB-Hicom with an unchanged 12-month target price of RM3.40.

Showcase of DEFTECH products and services. We saw a number of prototype and production units such as AV8, AV6 & AV4 armoured wheeled vehicles, customised 4x4 Jeep & Humvee and military truck. Besides products, DEFTECH also showcased its maintenance, repair and overhaul (MRO) services for Pendekar main battle tanks, Adnan ACV-300 armoured vehicles and Hicom Handalan trucks.

AV8 to start contributing from FY15 (Mar). We saw two variants of the AV8 – IFV 25 and AFV 30 on display at the exhibition. DEFTECH targets to deliver 12 units of AV8 by end-2014 and will produce a total of 257 units to be delivered by 2018 (a total of 12 variants including armoured ambulances, mortar carriers, command and surveillance vehicles variants). Management declined to indicate the cost of each AV8 citing military sensitivity, but pointed out the total costs would include R&D, transfer of intellectual rights & technology, personnel training and MRO services. The AV8 project is not merely assembly work but development of the whole eco-system including armament, weapon systems, engineering, MRO and support for the 257 AV8 vehicles to be delivered.

CTRM to complement DEFTECH’s capabilities and range of products. DRB-Hicom acquired Composites Technology Research Malaysia (CTRM) for RM298m in 2013 for its expertise in composite materials. CTRM’s composite capabilities will be useful for the AV8 project as well as extending DEFTECH’s reach to aviation defence & security segment (currently, DEFTECH’s key strengths are on land-based vehicles).

Maintain Outperform. We maintain our Outperform call on DRB-Hicom with an unchanged target price of RM3.40 based on sum-of-parts valuation. While concerns on Proton’s performance may continue to weigh on DRB- Hicom performance in the near term, we believe contributions from CTRM and the AV8 project from FY15 will help to buffer potential weakness in earnings contribution from Proton.