-  We re-initiate coverage on DRB-HIcom Bhd, with a Buy call based on a fair value of RM3.65/share – a 15% discount to our SOP value of RM4.31/share.

-  The discount takes into consideration the state of flux within the group, particularly involving the resolution of both structural and non-structural issues at its newest member, the Proton group. It is a work in progress (WIP) as earnings potential would take time to be realised.

-  The group’s core value is premised on:-

(i) its automotive assets: DRB-Hicom is involved in every step of the industry’s ecosystem and value chain; this division includes an all important part in Deftech, which has a 7-year RM7.5bil contract with the government. How well this division does also depends on the performance of Proton and Lotus.

(ii) stable and reliable services segment: These include the concession businesses (vehicle inspection, solid waste management and airport ground-handling), Islamic banking and postal services; and

(iii) valuable landbank which includes 1,400-1,500 acres of undeveloped residential land in Tanjung Malim (Proton City – which is now fully-owned), and 903 acres in Tebrau, Johor, apart from premium parcels in Klang and Glenmarie Shah Alam; it has been reported that it plans to carry out several projects with a combined GDV of RM11bil in the next five years.

-  Within the automotive division, exciting plans are being rolled out to expand its 70:30 JV with Volkswagen, while its negotiations with Honda Motors are in full swing for a potential platform-sharing venture. The near- and mediumterm issues (both structural and non-structural) of its automotive segment stemming from the volatile and highprofile Proton business will be tempered by the stable services division and dependable property segment.

-  DRB-Hicom is attempting to lay the foundation to rejuvenate Proton’s fortune and future growth. We believe this can only be done by re-assessing the way Proton builds its cars (for e.g., the potential sharing of platforms with Honda could slash its car development cost by half), upping vendor capabilities, and by boldly consolidating its manufacturing facilities, which would likely happen within two-three years, in our view.

-  DRB-Hicom remains as the cheapest conglomerate; hence, our Buy call. The key risks include inability to realise the potential platform-sharing venture and widening losses at Lotus.

Source: AmeSecurities