Highlights/ Comments

DRB  has  announced  that  its  100%  owned  KLAS  has proposed  to  purchase  100.0% stake in  Gading Sari  (GS) for  RM72m  or RM4.80/share.

A brief search through  the web  revealed  the following:

1)  Gading  Sari  is  a  private  company  owned  by  Pahang’s Crown  Prince.

2)  Gading  Sari  is  a  Malaysian  cargo  air  service  that operates  for  Poslaju (32.2% owned  by DRB).

3)  T he  company  operates  2  B737-400F  (average  aged  21 years;  leased  from  Transmile  Air  Services)  to  the  East Malaysia cities of Kuching, Miri and Kota Kinabalu.

Along  with  acquisition of KLB  (1Q14), GS acquisition is step forward  to  turn  KLAS  into  a  leading  integrated  logistic (warehouse,  distribution  and  supply  chain)  service  provider in Malaysia,  supported  by DRB group  of businesses.

However,  we  are  relatively  negative  on  the  high acquisition  price  of  RM72m,  which  is  10x  P/NAV  (Net asset value of RM7.2m in 2013) and  32.7x P/E  (RM2.2m net profit in 2013).

DRB  may  need  to  pay premium for the acquisition, given that  the  company  owns  Air  Operator  Certificate  (AOC). The  existing  shareholders  will  assist KLAS in the renewal of AOC, due to expire  in Feb  2015.

The  whole exercise is expected to complete by end 2014.

Risks

• Slowdown  in the Malaysian  economy.
• Global automotive  supply chain disruption.
• Sudden  jump in fuel  prices and interest rate.
• Depreciation  in  RM.

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 RM3.00  based on 20% discounts to SOP.

Source: Hong Leong Investment Bank Research - 11 Nov 2014