Highlights

According to Business Times, DRB Group plans to redevelop Proton Shah Alam plant area into a mixed development with GDV (Gross Development Value) of RM4bn.

Proton owns the 100ha complex, which houses its main factory, a smaller multi-vehicle plant, a casting plant as well as an engine machining and assembly building.

The current operation in Shah Alam plant will be relocated to Proton City in Tanjung Malim.

The re-development will boost DRB-HICOM's property development division and help to consolidate Proton business, in making Proton more efficient and lower cost of production.

With an estimated net margin of 20-30%, DRB is expected to accumulate net profit of RM800m-RM1.2bn. Comments  There have always been on-going talks on the potential land development of Proton Shah Alam plant, even before DRBHicom privatized Proton in 1H12 given the strategic locations.

We are positive with the land re-development, which will allow DRB to improve Proton Tanjung Malim plant utilization rate (lower unit cost), while monetizing Proton Shah Alam plant to improve DRB net gearing and increase profitability.

However, we were made to understand that numerous issues (i.e. staffs re-allocation and supply chain network) need to be sorted out by the management, before the plan can be proceed. The exercise may take years, and hence we can expect status quo on the Shah Alam plant in the near term.

We have yet to impute any upside from Proton Shah Alam re-development plant, since it is not firm.

Risks

• Slowdown of Malaysia economy affecting car sales.
• Global automotive supply chain disruption.
• Slow integration of Proton and Pos.

Forecasts

Unchanged, pending upcoming FY03/13 analyst briefing (to be determined at a later date).

Rating

BUY 

Positives –

• Acquiring and restructuring of Proton, to turn DRB into a major integrated automotive player in the region.
• Partnering VW group to set up regional hub in Malaysia.
• Honda Malaysia to set up regional hub for Hybrid car.
• Severely undervalued counter.
• Deftech awards of RM7.55bn over 7 years.
• Synergy of POS with DRB’s other business units.

Negatives –

• Bank tightening financing measures.

Valuation

Maintained Buy on DRB with unchanged Target Price of RM3.36 based on 20% discounts to SOP.

Source: Hong Leong Investment Bank Research - 04 Jun 2013