News

Chrysler International Group (Chrysler) has appointed DRB’s wholly owned EON as the exclusive distributor (sales and services) for Chrysler Jeeps for Malaysia, as part of Chrysler effort to strengthen its position in Malaysia market. Four models will be made available – Grand Cherokee, Cherokee, Wrangler and Compass.

Furthermore, EON has also been granted non-exclusive rights to distribute genuine parts, accessories and components for Chrysler.

DRB-HICOM Auto Solution (100% owned) has been appointed by the parties to import Chrysler CBU units into Malaysia.

The agreements shall be effective for 3 years term and renewable for another 1 year term.

Comments

Positive on the new exclusive distributorship for DRB Group, as Chrysler will diversify DRB’s product offerings. We do not discount the possibly of Chrysler extending its range of marques (Dodge, Ram, SRT and Fiat) and entering into CKD manufacturing contract with DRB Group (through Hicom Automotive Manufacturing in Pekan).

However, the agreement is not expected to have material impact on DRB’s financials in FY03/15 but will improve future earnings.

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 as well as sale of non-core assets) and extract synergies within the group, while expanding its portfolio of business (i.e. new distributorship, contract assembling, and components and parts manufacturing).

Risks

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

Forecasts

Unchanged.

Rating

BUY

Positives –

• Restructuring of Proton and Lotus.
• Partnering VW group to set up regional hub in Malaysia.
• Honda Malaysia to set up regional hub for Hybrid car.
• Severely undervalued counter.
• Deftech’s MoD contract 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 RM3.00 based on 20% discounts to SOP.

Source: Hong Leong Investment Bank Research - 25 Jun 2014