- We maintain BUY on DRB-Hicom Bhd, with an unchanged fair value of RM3.65/share – a 15% discount to our SOP value of RM4.31/share.

- DRB-Hicom’s subsidiary DRB-Hicom Defence Technologies Sdn Bhd (Deftech) last Friday inked a deal with the Minister of Finance Inc (MoF) to acquire the latter’s 96.87% stake in Composites Technology Research (CTRM) for RM298.26mil.

- It will be paid via RM122.06mil cash to MoF and the settlement of the entire loan owed by CTRM to the government amounting to RM176.2mil. This appears to be a fair deal, given a PE of 14x and a PBV of 0.96x based on CTRM group’s unaudited PAT of RM20.85mil for the year ended 31 Dec 2012 and the unaudited consolidated net assets of RM311.27mil as at end- 2012.

- This is a positive development for the group. Stemming from the proposed acquisition, DRB-Hicom said it would diversify its revenue stream to other areas of defence, which includes aerospace. CTRM produces aircraft composite components, while its subsidiaries manufacture such components for aerospace and non-aerospace applications.

- The remaining 3.13% stake comprising 15.06mil shares in CTRM is held by Petronas. CTRM has a paid-up capital of RM481.84mil, and 17.23mil redeemable preference shares of RM1 each, which are entirely held by Petronas.

- The conditions include the execution of the agreement between CTRM and the government pursuant to the proposed loan settlement. DRB-Hicom expects the proposals to be completed by the first quarter of next year.

- Deftech now carries on one of DRB-Hicom group’s core businesses, i.e. the supply of land-based military vehicles. Its principal activities are the manufacture, maintenance, refurbishment or retrofitting of military and commercial vehicles, equipment, and spare parts for the Malaysian and regional governments.

- Deftech is the current bright spot in the group’s automotive activities, which are facing increasingly stiffer competition in the market. Under a 7-year contract, Deftech is expected to start rolling out RM7.5bil worth of armoured-wheeled vehicles (AWVs) by the first half of next year for the Ministry of Defence. We expect the earnings margins to be at a high single-digit level.

- A catalyst for the stock would be the confirmation from the ministry for Deftech to proceed with the roll-out of the contract.

Source: AmeSecurities