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

- DRB-Hicom is undertaking an MGO for haulier Konsortium Logistik Bhd (KLB) after inking a deal to acquire a 61.6% stake in the latter from Ekuinas Nasional Bhd for RM241mil or RM1.55/share.

- DRB-Hicom unit KL Airport Services Sdn Bhd (KLAS) is acquiring the 61.6% stake comprising 155.46mil shares in KLB from Ekuinas’ subsidiary Bendahara 1 Sdn Bhd. KLK was last traded at RM1.51/share.

- The MGO will be extended for the remaining 96.86mil shares for a total of RM150.2mil, which will be funded via internal funds and external borrowings. Assuming funding via borrowings entirely, its gearing ratio will rise from 0.91 times as at March 2013 to 0.97 times.

- The second largest shareholder in KLB is Lembaga Tabung Haji with 8.99% comprising 22.7mil shares. The entire exercise is expected to be completed by 1Q14.

- The price represents a premium of 3.33% to the 5-day VWAMP up to 24 October 2013 of RM1.50. The acquisition will not be earnings accretive and could be deemed as pricey.

- It represents a P/BV of ~2x based on the net assets of ~RM195.61mil as at 31 December 2012 and a 23.6x PE based on the net profit for FY12 of ~RM16.6mil.

- In comparison, its peer Freight Holdings Management is currently trading at CY13 and CY14 PEs of 12x and 10x, respectively, and at P/BV of 1.9x and 1.6x (based on Bloomberg numbers). For Integrated Logistics, it is trading at a CY14 PE of 37x. DRB-Hicom itself is now only trading at 7x-11x for FY14-FY16F.

- We maintain our numbers for now. Notably, under Budget 2014, investments in the logistics industry, as part of efforts to invigorate the services sector, will be spurred.

- Additionally, in order to enhance national security of territorial waters and borders, the government will allocate RM2.4bil for the strengthening of surveillance and upgrading of defence equipment. This includes the purchase of six offshore patrol vessels, four cargo aircraft and support equipment, as well as armoured vehicles.

- DRB-Hicom will be a beneficiary of its RM7.5bil armoured wheeled vehicle contract, which is awaiting finalisation from the government. We expect the contract to be rolled out by next year in line with Budget 2014.

Source: AmeSecurities