News

DRB announced that the group’s wholly owned USF-HICOM has entered into distribution agreement with Tata Motors for the exclusive distribution rights of selected Tata brand CBU (Completely Built-Up) and CKD (Completely Knock-Down) commercial Vehicles in Malaysia.

DRB-HICOM Auto Solution (100% owned) has been appointed by the parties to import Tata’s CBU units and CKD packs for assembly of CKD units in Malaysia.

The agreement is not expected to have material impact on DRB’s net assets and earnings in FY03/14, but will improve future earnings from the new distributorships.

Comments

We are positive about the new exclusive distributorship for DRB Group, as Tata will diversify DRB’s product offerings and improve capacity utilization of its assembly plant (complement the assembling of CKD units at its Pekan manufacturing facilities – Mercedes, VW, Isuzu, Hicom, Suzuki and Mitsubishi Fuso).

DRB is one of the largest automotive groups in Malaysia and South East Asia, with extensive presence in the automotive value chain after acquiring Proton Group (including Lotus Group) in early 2012.

The Group is undergoing continuous restructuring exercises to improve the group efficiency (i.e. restructuring of Proton and Lotus) and extract synergies within the group, while expanding its portfolio of business (i.e. new distributorship, contract assembling, and components and parts manufacturing).

DRB is likely to outperform market expectation with the successful launching of Proton’s Suprima S and Saga SV, Honda’s Jazz CKD and upcoming Mitsubishi Attrage.

The sales completion of Uni.Asia Life Assurance and General Insurance by 2014 will unlock values for DRB and reduce gearing.

Risks

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

Forecasts

Unchanged.

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.
• Weakening of MYR.

Valuation

Maintained Buy on DRB with unchanged Target Price of RM3.14 based on 20% discounts to SOP.

Source: Hong Leong Investment Bank Research- 10 Sep 2013