Highlights

DRB has announced that its 100% owned KLAS has acquired 61.61% stake in Konsortium Logistic (KLB) from major shareholder Bendahara 1.

The total consideration was RM241m (RM1.55/share) for the acquisition of 155,462,322 ordinary shares of KLB. The acquisition will be funded through combination of internal funds and external borrowings (not yet determined).

Following the exercise, KLAS is obligated to extend a mandatory general offer for the remaining 96,856,036 ordinary shares of KLIB, which is not owned by KLAS at offer price RM1.55/share.

The whole exercise is expected to complete by 1Q14.

Comment

The acquisition of controlling stakes in KLB by KLAS was inline with DRB’s focus to turn KLAS into a leading integrated logistic (warehouse, distribution and supply chain) service provider in Malaysia, supported by DRB group of businesses.

KLB provides total logistics services and inventory solutions, which include container haulage, freight forwarding, shipping agency and chartering, warehousing and distribution, and insurance agency.

KLB has been providing logistics services to leading domestic automotive players – Perodua, Proton and Naza. Other major customers include Petronas Carigali, Tenaga and Mass Rapid Transit Corp (MRT).

Despite the relative expensive valuation (See Figure #1), we believe the acquisition exercise represent another significant milestone to restructure DRB group and extracting synergies within the group. KLAS will integrate with KLB, supporting DRB’s automotive division as well as other businesses such as PosM and Scott & English.

Risks

• Malaysia economy slowdown.
• Global automotive supply chain disruption.
• Sudden jump in fuel prices and interest rate.
• Depreciation RM.

Forecasts

Unchanged given the relatively immaterial KLB’s earnings.

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 - 28 Oct 2013