-  DRB-Hicom yesterday inked an agreement with Tata Motors Ltd for the exclusive distribution rights of Tata CBU and CKD commercial vehicles in Malaysia – rekindling their earlier relationship in the segment that had ended in 2008.

-  Tata Motors and DRB-Hicom units USF-Hicom (M) Sdn Bhd and DRB-Hicom Auto Solutions Sdn Bhd also inked an agreement for the import of CBUs and the CKD components for assembly in Malaysia.

-  While it would be positive for the group over the long term, we do not expect the collaboration to contribute significantly to DRB-Hicom’s earnings.

-  The agreement, which would start upon fulfillment of all conditions precedent before 31 March 2014, is for a five-year period and renewable for the same duration. The CKD components will be assembled at the DRB-Hicom group’s Pekan manufacturing plant.

-  The conditions include:- 1) The execution of a technology licence agreement; and USFHICOM demonstrating that it can start operations to required standards.

-  DRB-Hicom, via 70%-owned Scott & English (M) Sdn Bhd, had assembled Tata commercial vehicles in Malaysia until the expiry of their previous deal in June 2008.

-  Then in April last year, DRB-Hicom Defence Technologies (DEFTECH) and Tata announced an agreement to supply selected military trucks to the Malaysian armed forces.

-  The renewal of their relationship will fuel earlier speculation that there may be truth yet of a possible collaboration between them in the development of a small car for the local and regional markets.

-  Tata is the maker of Nano, the small India-made and the world’s cheapest car, and the owner of the Jaguar and Land Rover premium brands. DRB-Hicom itself, which owns the luxury Lotus brand, has expressed interest in developing a global small car, via Proton.

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

Source: AmeSecurities