Investment Highlights

• We maintain our HOLD call and SOP-based FV of RM1.99/share on DRB-Hicom. DRB announced a plan to sell its entire 97.37% stake in Alam Flora to a wholly-owned unit of Malakoff called Tunas Pancar for RM944.6mil in cash.

Key details:

1) Alam Flora holds the concession for public cleaning and the collection of public waste in Pahang, Kuala Lumpur and Putrajaya for 22 years from Sep 2011 to Sep 2033.

2) DRB will direct the funds received towards repaying debt of RM500mil (comprising an IMTN of RM400.5mil and term loans of RM99.5mil), and RM444.6mil to cover development costs in Proton with any balance to be reserved for viable investments.

3) The purchase price was agreed on by both sides and it was mid-point of a DCF valuation by Deloitte that resulted in a value of RM875mil to RM1bil for Alam Flora. Malakoff said this was an opportunity to diversify from its power generation business and enter the waste management and environmental services sector.

4) The parties have 6 months to end-Jan 2019 to meet certain conditions for the deal and aim to conclude by end-March 2019. They need to obtain approvals from the federal government (the Ministry of Housing and Local Government, and MOF), the Pahang state government (which owns the remaining 2.63% in Alam Flora), shareholders of DRB and Malakoff, and Alam Flora’s own financiers.

5) In the case where the federal government does not approve of the deal, Alam Flora would appeal the decision only if both parties agree. If the approval is given but accompanied with changes that materially impact Alam Flora’s future earnings (i.e. changes in the tariff rate, scope of work or contract duration), the value for Alam Flora would be reduced by a maximum of 10% to RM852.2mil.

6) DRB said it would cover a PBT shortfall of up to RM140 million (within 2 years) if the annual PBT of Alam Flora falls below RM70mil/year as a result of a tariff reduction. The unit’s net profit ranged from RM94mil to RM108mil in the past three years.

7) DRB and Malakoff’s largest shareholders will abstain from voting. Etika Strategi, which owns 55.92% of DRB, is 90% owned by Tan Sri Syed Mokhtar who is an indirect major shareholder of MMC Corp. MMC is the largest shareholder in Malakoff with 19.69%.

Our comments:

1) The consideration for Alam Flora far exceeds the investment cost by DRB of RM94mil and Alam Flora’s last book value of RM283mil. We note that while the deal would result in a substantial net gain for DRB, the funds will go towards some items requiring immediate attention.

2) We are positive on the move by DRB to divest any non-core asset which would improve its earnings clarity. Moreover, we believe it is choosing to forgo a secure source of annual income in exchange for a significant sum that it requires in the short term.

3) The funds raised will slightly reduce DRB’s total debt to RM5.2bil and its gearing to 0.47x (from 0.56x). More importantly, it needs to reserve funds for the development costs in Proton as the carmaker can no longer count on the government for overt financial support. Recall that Proton had outstanding debt of RM500mil as of March and DRB said future capex would necessitate more debt. While the cost to develop a localized Boyue is minimal given the SUV platform from Geely, the future adoption of Geely cars will incur licensing and royalty fees. Loss-making Proton only has the options of more financial support from its owners or the government until it sees stronger cashflows many years down the line.

4) We retain our earnings projection given the extensive period to completion and various conditions that need to be fulfilled in the meantime.

Source: AmInvest Research - 2 Aug 2018